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Performance audit, Arizona Department of Commerce

Performance audit, Arizona Department of Commerce

A REPORT
TO THE
ARIZONA LEGISLATURE
Debra K. Davenport
Auditor General
Arizona Department
of Commerce
Performance Audit Division
SEPTEMBER • 2003
REPORT NO. 03 – 08
Performance Audit
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting servic-es
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Senator Robert Blendu, Chair Representative John Huppenthal, Vice Chair
Senator Gabrielle Giffords Representative Tom Boone
Senator Peter Rios Representative Ken Clark
Senator Thayer Verschoor Representative Ted Downing
Senator Jim Weiers Representative Steve Yarbrough
Senator Ken Bennett (ex-officio) Representative Jake Flake (ex-officio)
Audit Staff
Lisa Eddy, Manager and Contact Person
Jay Dunkleberger, Team leader Kirk Jaeger
Melinda Hardman Anita Rifkin
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
September 26, 2003
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Gilbert Jimenez, Director
Arizona Department of Commerce
Transmitted herewith is a report of the Auditor General, A Performance Audit and Sunset Review
of the Arizona Department of Commerce. This report is in response to a May 14, 2002, resolution
of the Joint Legislative Audit Committee. The performance audit was conducted as part of the
Sunset review process prescribed in Arizona Revised Statutes §41-2951 et seq. I am also
transmitting with this report a copy of the Report Highlights for this audit to provide a quick
summary for your convenience.
As outlined in its response, the Arizona Department of Commerce disagrees with most of the
findings related to modifying, transferring, or eliminating its major functions. However, it agrees
with all of the findings related to the tax credit programs it administers. All of the report
recommendations are directed at the Legislature and do not require action by Commerce at this
time. We have attached a brief reply to Commerce’s response to address some statements in
the response.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on September 29, 2003.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
Services:
According to its vision statement, the Arizona Department of Commerce strives to be “the
positive force that creates networks of stakeholders and partners who work to enhance the
prosperity of Arizona’s businesses and residents.” In addition to staff dedicated to
Administration, the Department carries out its efforts through four major divisions:
􀁺􇩃 Community Development—Provides technical and financial
assistance to towns, cities, counties, and tribal communities
on land-use planning, public infrastructure, and zoning;
􀁺􇩇 Global Business Development—Encourages retention,
expansion, and location of business across the State while
it supports entrepreneurs, small businesses, and minority-and
women-owned enterprises;
􀁺􇩗 Workforce Development—Shapes policies that support
coordination of workforce programs state-wide and admin-isters
job training grants; and
􀁺􇩐 Planning, Research, and Policy—Supports the develop-ment
of a long-range, state-wide economic agenda, and
serves as Commerce’s central point of current economic
data and coordinates projects that inform economic devel-opment
policies.
Mission:
To create vibrant communities and a globally competi-tive
Arizona economy, through leadership and collabo-rative
partnerships.
Facilities:
While previously leasing space in a privately owned building,
in March 2003, the Department relocated to the Capitol
Complex Executive Tower. The Department also leases
space in Taipei, Taiwan, and in Guadalajara, Mexico, for the
combined amount of $39,280 for two foreign trade offices.
PROGRAM FACT SHEET
Arizona Department of Commerce
Program revenue:
$25,676,200 (fiscal year 2003)
Program staffing:
94.3 FTE (as of January 1, 2003, includes 16.45 vacancies)
Office of the Auditor General
Community
Development
(29.5)
Global Business
Development
(21.3)
Administration
(21)
Workforce
Development
(12.5)
Planning, Research,
and Policy (10)
Employer-Funded
Arizona Job
Training Fund
$12,947,900
General Fund
$3,670,200
Federal Monies
$4,099,400
Commerce and Economic
Development Commission
(CEDC) Fund
(Primarily Arizona
State Lottery
proceeds)
$3,395,500
Other
$1,558,200
Equipment
In addition to owning standard office equipment, the Department leases nine vehicles
from the Department of Administration at a cost of $3,815 per month. The Department
also owns a hot air balloon, purchased in 1990 at a cost of $13,592, which is used by
the Arizona Film Commission, a unit within Commerce, to promote Arizona at film-relat-ed
and nationally televised events.
Department Core Goals (fiscal years 2003 through 2005)
1. Provide accurate, timely information on Arizona’s economy and business practices to support
sound public policy and the development of the State’s long-term economic strategy.
2. Create and support local initiatives designed to enhance community vitality.
3. Build and develop the State’s economic foundations to improve Arizona’s global competitive-ness.
4. Attract and retain high-quality jobs, increase capital investment, and grow strategic industries.
5. Model effective, efficient, and responsible government delivering services in a fiscally prudent
manner consistent with the highest standards of ethical conduct.
Adequacy of performance measures:
Commerce should improve its performance measures in the following areas:
􀁺􇩍 Measures Not Focused on Results—The Department should reduce its number of performance
measures and focus on those that address results. The Department has established 226 per-formance
measures in its FY 2003-05 Strategic Plan, many of which report its service efforts but
fail to report results. For example, some programs, such as International Trade and Investment,
measure the number of visits to its Web site. However, the program’s four performance measures
regarding online visits fail to measure the results achieved by accessing these pages, such as the
number of businesses assisted online.
􀁺􇩍 Measures Do Not Reflect Department’s Performance—The Department should report only those
results that are achieved substantially by its individual efforts. For fiscal year 2002, the Department
reported that it helped 59 businesses relocate or expand in the State. However, sometimes the
Department’s role is limited to accepting a telephone inquiry from the business, referring the busi-ness
to a local economic development entity for location assistance, and remaining available to
discuss any state-wide issues with the business.
State of Arizona
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Arizona Department of Commerce (Commerce) pursuant to a May 14,
2002, resolution of the Joint Legislative Audit Committee. This audit was conducted
as part of the Sunset review process prescribed in Arizona Revised Statutes (A.R.S.)
§41-2951 et seq.
Commerce is responsible for promoting and enhancing the State’s economic growth
and development, including encouraging international trade and investment; collect-ing
and distributing economic and business-related information to the public; sup-porting
the expansion of current businesses; and attracting new businesses to the
State. Additionally, Commerce assists communities with economic planning and
facilitates the State’s workforce development system.
The Department’s organization consists of four divisions and an administrative
group. First, the Community Development Division provides technical and financial
assistance to political subdivisions and communities on land-use planning, public
involvement, public infrastructure, and zoning. Second, the Global Business
Development Division encourages expansion and location of businesses across the
State and maintains four foreign trade offices. Next, the Workforce Development
Division supports the Governor’s Workforce Development Council, which supports
efforts to prepare participants for work, and administers apprenticeship programs
and the Arizona Job Training Program, a program that helps fund job training assis-tance
to Arizona businesses. Further, the Planning, Research, and Policy Division
serves as a clearinghouse for economic issues. Finally, Commerce’s administration
supports Commerce’s planning and operational needs by providing guidance, serv-ices,
and technical assistance to executive management and department divisions.
Commerce’s functions can potentially be eliminated,
modified, or transferred (see pages 7 through 28)
The Legislature should consider terminating 4 of 13 major functions carried out by
Commerce, primarily because other programs providing similar services already
exist.1 Another four functions are also available elsewhere, and the Legislature may
Office of the Auditor General
page i
SUMMARY
find there are some benefits to providing these functions, either through Commerce
or some other agency. The Legislature should retain the five remaining functions
because they do not duplicate other programs, or they do not require state appro-priations.
However, eliminating most or all of the eight functions may leave insufficient
reason to retain Commerce. If so, the remaining functions can be transferred to other
state agencies.
Auditors identified four functions that could be eliminated because these services are
available elsewhere, or Commerce’s role is very limited or may be reduced. These
four are as follows:
􀁺􇩓 Small Business Services—Similar services are available from other federal,
state, and private sources. While Commerce no longer provides one-on-one
business counseling, Small Business Services provides the public with user-friendly
online information on starting a business, works to develop state-wide
policies that concern small businesses, and assists women- and minority-owned
businesses through meetings, referrals, and outreach activities.
However, the federal government’s Small Business Administration has a network
of ten small business development centers and satellite offices across the State,
including two women’s business centers, which provide similar services and
assisted over 7,000 people in 2002. In addition, information on doing business
with the State, and within Arizona counties, along with finding businesses to pur-chase,
is also available from a variety of public and private sources, such as the
Arizona Department of Administration’s State Procurement Office, the Arizona
Department of Revenue, business brokers, and business advocates, such as
the National Federation of Independent Businesses.
􀁺􇩁 Apprenticeship and Pre-Apprenticeship—The apprenticeship function can be
transferred back to the federal government for administration, and the pre-apprenticeship
function—a highway construction training program—can be
transferred to the Arizona Department of Transportation (ADOT). Apprenticeship
Services approves and registers all apprenticeship programs in the State, and
provides certificates to apprentices who complete these programs. Arizona
petitioned for the U.S. Department of Labor’s approval to administer this func-tion
in 1978. However, the State does not receive any federal funding to admin-ister
the program. The State could return this function to the federal government,
which administers the program in 23 other states. The Pre-Apprenticeship
Training Program for Highway Construction Careers offers a 6-week training pro-gram
for minorities and women in highway construction trades and is funded by
the ADOT using federal pass-through monies. This function was placed in
Commerce because of its close association with the apprenticeship function. If
responsibility for apprenticeship is returned to the federal government, retaining
pre-apprenticeship in Commerce is unnecessary.
State of Arizona
page ii
􀁺􇩅 Economic Information and Research—This function could be eliminated
because information retained at Commerce is already available from many other
sources throughout Arizona, and other sources have additional economic
research and analysis that is unavailable from Commerce. Under A.R.S. §41-
1504(A), Commerce acts as a central point of collection for economic data and
coordinates research projects and analysis on economic development issues
for the State. It also disseminates this information to the public. However, much
of the information Commerce publishes is already available from sources such
as the U.S. Census Bureau, the Arizona Department of Revenue, and the
Arizona Tax Research Foundation. Further, other organizations, such as the
Arizona Department of Economic Security and Arizona State University, maintain
additional economic information unavailable from Commerce. Moreover,
Commerce’s role is generally not to perform its own research, but rather to coor-dinate
the efforts of others.
􀁺􇩇 Growing Smarter functions—The Legislature can eliminate Commerce’s role in
the State’s Growing Smarter program, since its review role is only generally
defined in statute as advisory and could be reduced. Under Growing Smarter,
all Arizona cities and counties must adopt comprehensive, long-range plans that
address issues such as land use, open space, growth, and water resources.
A.R.S. §§9-461.06 and 11-806 require Commerce to receive copies of the plans
and any amendments made to existing plans before they are adopted by the
cities or counties. It also provides technical assistance with Growing Smarter
and planning. Because the statute does not describe the extent of the review or
comment, Commerce’s role is advisory only, and cities and counties are free to
ignore Commerce’s suggestions. Further, Commerce’s review and technical
assistance roles could be reduced, since the majority of cities and counties are
required by statute to submit their plans by December 31, 2003. After that time,
Commerce will review amendments or new plans.
Auditors identified four other programs that, like three of the first four, are largely avail-able
elsewhere. In the case of these four, however, there may be advantages to
retaining a state function in some form:
􀁺􇩉 International Trade and Investment Office—The Legislature could eliminate this
office, retain its functions, or ensure that Commerce charges for a portion of the
costs of its export promotional services. The Office promotes Arizona products
and services for export, and markets Arizona to foreign companies as a location
for expansion. However, the federal government and other private entities pro-vide
many similar services, sometimes for a fee. Commerce maintains that no
other entities work to bring foreign investment into the State, and other entities
would not exclusively serve Arizona clients. Commerce has statutory authority to
charge for services and is already doing so for certain functions, such as host-ing
trade shows and trade missions. Should the Legislature decide to retain this
Office of the Auditor General
page iii
function, the State could also charge a fee for other office services as well, mak-ing
this function more self-supporting.
􀁺􇩂 Business Attraction and Development and the Office of Innovation, Technology
and Entrepreneurship—The Legislature could eliminate this function, or as an
alternative, retain only its role as a primary source of contact for companies
seeking to relocate to Arizona. Business Attraction and the Office of Innovation
market the State nationally and internationally, and promote technology transfer,
research, and development in Arizona. However, approximately 300 local and
state-wide economic development organizations also offer many of these serv-ices,
and literature suggests state programs designed to attract business have
only a limited impact. Some of this function could be retained because of its
state-wide approach to business attraction. According to Commerce and
Arizona businesses, Commerce provides significant value because it is a single
source for businesses to obtain impartial information about potential sites and
the State’s business climate.
􀁺􇩒 Rural Development—This function could be eliminated, but doing so may have
consequences for some projects. Rural Development helps rural communities
with technical and financial assistance for downtown revitalization, economic
development, and business retention and expansion through its Main Street and
Rural Economic Development Initiative (REDI) programs. However, these grants
are generally small, and other sources such as the State Historic Preservation
Office and private fund-raising are available for financial assistance. Without
REDI and Main Street assistance from Commerce, rural communities might not
be able to carry out some projects, while others might take longer due to the
need to look for other sources of funding.
􀁺􇩁 Arizona Film Commission—The Legislature could eliminate this function or com-bine
the Commission with the Office of Tourism. The Commission assists pro-duction
companies that approach it about filming in Arizona. However, the
Arizona Production Association, a state-wide trade association, already publish-es
a guide that helps production companies find services from private suppliers,
and 22 local communities such as Tucson, Benson, Kingman, and the Navajo
Nation maintain film offices. Commerce argues that the Film Commission is jus-tified
because revenues from companies filming in the State exceed the
Commission’s budget. If the Legislature elects to keep the Commission, it could
transfer the Commission to the Office of Tourism because both groups work to
enhance the State’s visibility and the Office of Tourism already is involved in
assisting noncommercial film projects. An Office of Tourism official acknowl-edges
that the merger is feasible.
Commerce’s other five major functions should be retained because they provide
valuable services to Arizona businesses, workers, cities, or counties, or do not
require state appropriations. However, all five could potentially be transferred to other
State of Arizona
page iv
agencies, and the Legislature could eliminate Commerce’s administration functions
if it decides to sunset the Department of Commerce.
􀁺􇩔 The Arizona Job Training Program—This function is unique, funded primarily by
business, and is intended to improve the effectiveness of the workforce. It can
be modified so that it is completely self-supporting. This program could be
transferred to the Department of Economic Security (DES) because federal poli-cies
support combining job training programs, and DES operates the majority
of the State’s other job training programs.
􀁺􇨠 Staff Support for the Governor’s Workforce Development Council—The
Council’s duties are required by the federal government in order to allocate fed-eral
monies for programs that improve the quality of the State’s workforce. Staff
support for the Council could be transferred to DES because DES administers
these programs.
􀁺􇩅 Energy Office—The Energy Office receives more than $5 million each year from
the federal government and uses no state monies. It could be transferred to the
Arizona Department of Housing. The Department of Housing’s mission is to
facilitate affordable housing in Arizona, and the Energy Office’s role in reducing
buildings’ energy consumption could fit well within this mission.
􀁺􇩐 Private Activity Bond Function—This function should be retained because it
helps make bond funds available for projects in Arizona cities and towns. The
program could be transferred to the Commerce and Economic Development
Commission, which serves the State by investing in state-wide economic proj-ects.
􀁺􇩁 Arizona Military Airport Regional Compatibility Project—The Project, which is
currently funded primarily by a federal grant, serves a role by looking at military
air base land use from a state-wide perspective. It could be transferred to any
one of a number of executive agencies.
􀁺􇩁 Agency Administrative Functions—If the Legislature elects to sunset the agency,
it could eliminate Commerce’s agency-wide support functions such as the
Director’s Office, Human Resources, and its communications functions.
Legislature should consider evaluating tax credit pro-grams
before they are renewed or altered (see pages 29
through 37)
The Legislature should consider evaluating current tax incentive programs before
they are renewed, extended, or expanded, terminating those that are not proven
Office of the Auditor General
page v
effective. Commerce administers five tax incentive programs. While complete data is
not available for release due to the Department of Revenue’s (Revenue) confiden-tiality
statutes, businesses claimed at least $65 million in income tax credits alone
from tax years 1994 to 2000 and hold an additional estimated $60 million in unused
income tax credits that could be used on future returns. However, research suggests
that targeted incentives such as those used in the Commerce-administered pro-grams
have little impact on economic growth. For example, literature studying enter-prise
zones, which is Commerce’s largest incentive program as measured by the
number of credits used, found there was no significant impact of these zones in
increasing firm births, expansions, relocates, or income; job creation; or reducing
unemployment. In fact, a recent study of Ohio businesses found that enterprise zone
incentives in that state actually resulted in 20 percent fewer jobs being created.
Researchers point out that other factors besides tax incentives play a larger role in
economic development. For example, the labor market is far more important in busi-ness
investment decisions. In Arizona, one report noted that tax incentives were
ranked 14 out of 17 as a factor in business location decisions.
In addition to this limited impact on economic development, there are drawbacks to
government incentives. First, they can be costly. One comprehensive study of 75
enterprise zones in 13 states determined that state and local governments lost
approximately $59,000 per job. Further, incentives could have other unintended con-sequences,
such as the state’s inability to enforce provisions to recoup its investment
should the companies leave; the diversion of resources from state and local govern-ments
that could go to support other government services; and lack of growth
because capital and labor are simply moved from one place to another.
The Legislature should consider taking a number of steps necessary to evaluate the
effectiveness of Commerce-administered tax incentive programs. Other states have
taken steps to review their tax credit programs to determine whether they are cost-effective.
For example, two West Virginia organizations reviewed the state’s 22 tax
incentives for their effectiveness and recommended half of them be eliminated.
However, Revenue’s confidentiality statutes currently limit the state’s ability to accu-rately
estimate the costs of these programs. Therefore, the Legislature should follow
steps taken in other states to modify Revenue’s statutes to allow more complete dis-closure
of income tax incentives’ impact on the State. Once this is done, the
Legislature should require an analysis of Commerce’s Enterprise and Military Reuse
Zones as they expire to determine their cost-effectiveness, and require the elimina-tion
of those that are not cost-effective. Further, if the Legislature elects to expand or
extend any of Commerce’s tax incentive programs, it should consider a similar analy-sis.
Finally, the Legislature should consider requiring a cost-effectiveness analysis of
the credits before adopting new tax incentives.
State of Arizona
page vi
Other pertinent information (see pages 39 through 42)
During the audit, auditors gathered information about combining the organizational
structures of the Arizona Department of Commerce and the Arizona Office of
Tourism. In 35 states, economic development and tourism functions are organized
as one agency. However, several states have organized these functions into separate
agencies, and other states have adopted an altogether different structure for tourism
and economic development agencies, including where the functions are separated
in various state agencies or performed by private sector companies. Economic
development and tourism officials from Arizona and other states had differing per-spectives
regarding the relative advantages and disadvantages of various organiza-tional
structures for tourism and economic development functions. Some suggested
that combining the two functions could result in cost savings from shared marketing
efforts and reductions in staff. However, these officials cautioned that savings from
staff reductions are likely to be limited. Some tourism stakeholders also expressed
concerns over the possible loss of prominence that Tourism could face if it is com-bined
within a single economic development agency.
Office of the Auditor General
page vii
State of Arizona
page viii
Office of the Auditor General
TABLE OF CONTENTS
continued
page ix
1
7
7
14
22
28
29
29
30
34
37
39
39
40
41
43
a-i
Introduction & Background
Finding 1: Commerce’s functions can potentially be elimi-nated,
modified, or transferred
Four functions could be eliminated
Various options exist for four functions
Other major functions should be retained
Recommendations
Finding 2: Legislature should consider evaluating tax
credit programs before they are renewed or altered
Commerce administers five tax credit programs
Research indicates that tax incentives induce only limited economic
growth
Changes needed to better evaluate Arizona credits
Recommendations
Other Pertinent Information
Commerce and Tourism functions are in separate agencies in
Arizona
Other states organize commerce and tourism differently
Various perspectives regarding potential cost savings and structure
Sunset Factors
Appendix
Summary of five income tax credits administered by the Department
of Commerce
State of Arizona
TABLE OF CONTENTS
concluded
page x
Notes
Agency Response
Auditor General Reply
To Agency Response
Tables:
1 Schedule of Revenues, Expenditures, and Changes in Fund
Balance by Program
Years Ended June 30, 2002, and 2003 (Unaudited)
2 Arizona Department of Commerce Functions, FTEs, and General
Fund and Commerce and Economic Development Commission
(CEDC) Fund Expenditures, Fiscal Year 2003
Commerce-Administered Tax Incentive Programs
3 Commerce-Admininstered
Tax Incentive Programs
a-v
4
8
31
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Arizona Department of Commerce (Commerce) pursuant to a May 14,
2002, resolution of the Joint Legislative Audit Committee. This audit was conducted
as part of the Sunset review process prescribed in Arizona Revised Statutes (A.R.S.)
§41-2951 et seq.
Overview of Commerce’s functions
The Department was established by the Legislature in 1985 with responsibilities for
promoting and enhancing the State’s economic growth and development. Its duties
include encouraging international trade and investment, collecting and distributing
economic- and business-related information to the public, supporting the expansion
of existing businesses, and attracting targeted businesses to Arizona. In addition, it
assists communities with economic planning and facilitates the State’s workforce
development system by supporting the Governor’s Workforce Development Council.
To perform its responsibilities, as of January 1, 2003, the Department was organized
and staffed as follows:
􀁺􇨠 Community Development Division (29.5 FTE)—Provides technical and financial
assistance to political subdivisions and communities. It provides development
guidance and technical assistance in land use and zoning; contributes basic
technical and financial assistance for public infrastructure projects to rural com-munities;
promotes programs to reduce energy costs in government, commer-cial,
and residential buildings; offers energy information to support reduced util-ity
costs for low-income residents; and supports community organizations in
their economic development practices. The division consists of Community
Planning, the Greater Arizona Development Authority, the Energy Office, and
Rural Development.
􀁺􇩇 Global Business Development Division (21.3 FTE)—Works to help Arizona busi-nesses
market their products and services in international markets by providing
Commerce promotes
Arizona’s economic
development.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
assistance with exports to foreign countries, market research, and organization
of foreign trade shows. It also markets the State to attract new and expanding
businesses, encourages the film business within Arizona, and offers assistance
and resources to speed entrepreneurship growth throughout the State. The divi-sion
consists of the International Trade Office, the Arizona Film Commission,
Business Attraction and Development, Small Business Services, and the Office
of Innovation, Technology, and Entrepreneurship.
􀁺􇩗 Workforce Development Division (12.5 FTE)—Supports the coordination of
workforce programs state-wide. The Workforce Policy Office assists the
Governor’s Workforce Development Council with coordination of the State’s
workforce development initiatives, such as establishing goals for development
of employment and training systems. The division also includes apprenticeship
services, a pre-apprenticeship highway-construction trades program for women
and minorities, and the Arizona Job Training Program, which provides grant
money to businesses for employee job training.
􀁺􇩐 Planning, Research, and Policy Division (10 FTE)—Serves as the State’s clear-inghouse
for economic information, manages strategic research, and provides
and distributes information and analyses of trends, best practices, opportunities,
market issues, and department/program impacts related to economic issues
within the State. It consists of Research and Information, the Legislative Liaison,
and Communications.
􀁺􇩁 Administration (21 FTE)—Supports the Department’s planning and operational
needs by providing guidance, services, and technical assistance to executive
management and department divisions. Services provided include accounting
and budgeting, human resources, information technology, procurement, finan-cial
management, and administering five tax credits. This division also provides
administrative support for the Commerce and Economic Development
Commission (CEDC), a commission that administers a fund providing financial
assistance to support the State’s economic development efforts.
Within the Department of Commerce are the CEDC and the Greater Arizona
Development Authority (GADA), which are separate agencies that operate under
their own statutes. CEDC is a six-member Commission that administers the Arizona
State Lottery-supported CEDC Fund, which will have an estimated FY 2003 balance
of approximately $3.6 million. The CEDC provides financial assistance to support the
State’s economic development efforts and is staffed by two Commerce employees.
GADA assists local and tribal governments and special districts with the develop-ment
of public infrastructure. It uses its $20 million bond authority to leverage fund-ing,
accelerate project development, and lower the costs of project financing.
As of January 1, 2003, the Department had 94.3 FTEs, including 82.9 FTEs in author-ized
positions and 11.4 FTEs in other positions that were funded through nonappro-
State of Arizona
page 2
priated sources such as federal grants and contracts. As of January 1, 2003, the
Department had 16.45 FTE vacancies among its positions.
Budget
During fiscal year 2003, Commerce received an estimated $27.5 million in total rev-enues,
of which almost $4 million was from the General Fund. However, the largest
amount of revenue was from the federal government and other state agencies. This
included over $13.4 million for the Workforce Development Division received from the
Arizona Job Training Fund, and more than $5 million for the Energy Office programs
from the federal government (see Table 1, page 4). Additionally, Commerce received
over $2.8 million in monies from the Commerce and Economic Development
Commission. These monies are from two Arizona State Lottery games and registra-tion
fees for securities sold in Arizona, and are used to support the State’s econom-ic
development efforts as well as the operations of three Commerce divisions. The
Legislature may redirect CEDC monies for any purpose, including the State General
Fund.
Commerce’s fiscal year 2004 General Fund and Arizona Job Training Fund appro-priations
are less than in fiscal year 2003. Specifically, the Legislature reduced
Commerce’s General Fund appropriations by $340,500, a reduction of approximate-ly
9 percent. According to one Commerce official, the agency plans no reduction in
services as a result of these budget changes. Further, the Legislature enacted a law
allowing the State to transfer monies from the Department’s Job Training Fund to the
Department of Economic Security’s JOBS program, which provides job training for
welfare clients. The Legislature and the Governor approved a $3.7 million transfer
from the Job Training fund to JOBS in fiscal year 2004, and transferred an additional
$2.5 million from the fund to the state’s General Fund.
Audit scope and methodology
This audit focused on the need for Commerce’s functions, its overall responsibilities,
and whether the Legislature should consider eliminating or transferring Commerce’s
programs. In general, auditors found that even though Commerce attempts to attract
businesses and enhance economic development, research suggests many factors
beyond a state agency’s control influence business location decisions. These factors
include labor force costs, educational level of workers, and access to transportation.
This report contains two findings and associated recommendations as follows:
􀁺􇩔 The Legislature should consider taking action on several Commerce functions
because they are unneeded, duplicated elsewhere, or can be transferred.2
During fiscal year 2003,
Commerce received
$27.5 million in rev-enues.
Office of the Auditor General
page 3
State of Arizona
page 4
2002
Community
Development
Global
Business
Development
Workforce
Development
and Job Training
Planning,
Research,
and Policy 1
Finance
and
Administration
Revenues:
State General Fund Appropriation $ 1,356,395 $ 1,701,285 $ 318,915 $ 905,347 $1,219,220
Intergovernmental 2,759,498 95,708 15,189,873 251,800
Lottery proceeds 2 232,920 692,839 1,048,141
Motor vehicle taxes 11,255,598
Interest and other 2 2,004,791 1,153,158 888,085 1,274,788 865,154
Total revenues 17,609,202 3,642,990 16,396,873 3,480,076 2,084,374
Expenditures and other uses:
Personal services and employee-related
1,486,104 1,600,581 547,119 683,938 1,160,662
Professional and outside services 427,676 1,158,552 2,019 120,072 61,772
Aid to organizations 9,289,255 3,273,615 1,083,629
Travel, other operating and equipment 532,607 1,199,163 139,479 1,917,827 88,457
Total expenditures 11,735,642 3,958,296 3,962,232 3,805,466 1,310,891
Net operating transfers out 3 8,147,762 10,550,070 281,010
Total expenditures and net
operating transfers 19,883,404 3,958,296 14,512,302 3,805,466 1,591,901
Excess of revenues over (under) expend-itures
and net operating transfers 4 $ (2,274,202) $ (315,306) $ 1,884,571 $ (325,390) $ 492,473
2003
Community
Development
Global
Business
Development
Workforce
Development
and Job Training
Planning,
Research,
and Policy 1
Finance
and
Administration
Revenues:
State General Fund Appropriation $ 524,900 $1,181,628 $ 304,676 $ 692,401 $ 966,588
Intergovernmental 3,902,166 12,487,855
Lottery proceeds 2 337,171 1,242,079 899,950
Interest and other 2 951,516 614,078 592,872 332,613 645,718
Total revenues 5,715,753 3,037,785 13,385,403 1,924,964 1,612,306
Expenditures and other uses:
Personal services and employee -
related 1,464,746 1,381,121 668,868 776,348 1,188,526
Professional and outside services 1,089,673 1,059,112 74,091 604,815 72,837
Aid to organizations 3,389,134 4,213,401 719,107
Travel, other operating and equipment 509,816 __ 773,984 234,188 197,349 609,513
Total expenditures 6,453,369 3,214,217 5,190,548 2,297,619 1,870,876
Net operating transfers out 3 8,258,082 4,835,280
Total expenditures and net
operating transfers 14,711,451 3,214,217 10,025,828 2,297,619 1,870,876
Excess of revenues over (under) expendi-tures
and net operating transfers 4 $ (8,995,698) $ (176,432) $ 3,359,575 $ (372,655) $ (258,570)
1 Excludes financial information of the Greater Arizona Development Authority because it is a legally separate entity. Further, the Community Development
program estimates for 2003 exclude Clean Air Fund activity because the Fund and its functions were transferred to the Arizona Department of Environmental
Quality in August 2002. However, the Planning, Research, and Policy program includes Commerce and Economic Development Commission (CEDC)
financial activity because the Department essentially controls the Commission’s finances.
2 The CEDC provides Lottery proceeds and a portion of interest and other revenues to the programs.
3 Amounts are primarily transfers to the State General Fund or other state agencies as required by law.
4 Excess of revenues under expenditures was or will be paid from each program’s available fund balances.
Source: Auditor General staff analysis of the Arizona Financial Information System (AFIS) Accounting Event Transaction File for the years ended June 30,
2002 and 2003.
Table 1 Schedule of Revenues, Expenditures, and Changes in Fund Balance by Program1
Years Ended June 30, 2002, and 2003
(Unaudited)
􀁺􇩔 The Legislature should consider modifying the Department of Revenue’s confi-dentiality
statutes so that the true costs of Commerce’s income tax incentive
programs can be identified. Further, the Legislature should consider requiring a
cost-effectiveness analysis before Commerce renews each Enterprise Zone
and/or the Legislature and Governor renew each Military Reuse Zone, terminat-ing
those zones that are not proven effective, and before renewing or revising
any Commerce-administered tax incentive program. Finally, before new tax
incentives are adopted, the Legislature should consider conducting a cost-ben-efit
analysis of the proposed incentives.
In addition to these findings and recommendations, the report also presents infor-mation
related to different models of how economic development and tourism func-tion
are structured in the 50 states, as well as key issues concerning combining these
functions into one organization.
Auditors used various research methods to study the issues addressed in this report,
including interviewing Commerce staff and outside stakeholders, and reviewing
Commerce’s financial information, statutes, and rules. Auditors also reviewed annu-al
reports, meeting minutes, and Commerce’s strategic plan, in addition to attending
meetings such as the Governor’s Rural Development Conference and a Growing
Smarter Executive Committee meeting. Auditors also used the following specific
methods:
􀁺􇩁 Auditors reviewed literature in economic development and job creation from a
variety of sources, such as the International Journal of Economic Development
and the New England Economic Review to determine the effectiveness of gov-ernment
economic development efforts (see End Notes, pages a-v through a-vii
for a complete listing). To assess the level of potential function duplication and
evaluate whether those functions should be eliminated, modified, or transferred
to other entities, auditors interviewed members of economic development
groups such as the Arizona Association for Economic Development, Arizona
Chamber of Commerce, Greater Phoenix Economic Council, and Arizona uni-versity
representatives in economic development. In addition, auditors inter-viewed
representatives of other state agencies, including the Departments of
Economic Security, Education, Environmental Quality, Tourism, and
Transportation. Auditors also consulted federal government representatives
from the United States Department of Labor’s Bureau of Apprenticeship and
Training Western Region, the United States Departments of Energy and
Commerce, the United States Department of Defense, and the Small Business
Administration to determine the extent to which Commerce’s functions are dupli-cated,
and evaluate whether the functions should be eliminated, modified, or
transferred.
Office of the Auditor General
page 5
􀁺􇩔 To determine the effectiveness of tax credit incentives and whether their out-comes
benefit the State, auditors reviewed publications on tax credits and other
incentive programs (see End Notes, pages a-v through a-vii), legislative testi-mony
from the Arizona Tax Research Association, and available tax credit data
from Commerce and the Department of Revenue, and reviewed and assessed
the Arizona Department of Revenue’s confidentiality statutes. In addition, audi-tors
contacted representatives from six companies and two site selection firms
to evaluate the impact of the enterprise zone tax credit on companies’ location
decisions. Auditors also interviewed one researcher with expertise in the tax
incentive field to obtain his perspective on the impact of government tax incen-tives
on economic growth. Further, auditors attended a meeting of the Joint
Legislative Income Tax Credit Review Committee.
􀁺􇩔 To determine how states organize their tourism and economic development
functions, auditors reviewed information provided by the Department of
Commerce, information from other states’ Web sites, and the Travel Industry of
America’s 2000-2001 Survey of U.S. State and Territory Tourism Offices. To
obtain their perspectives on the benefits and disadvantages of these structures,
auditors contacted representatives of Arizona’s economic development and
tourism industries, as well as officials from tourism and economic development
agencies in Florida, New Mexico, Utah, and Washington.
Two entities that work within Commerce were not reviewed during this audit because
they have separate sunset legislation: the State Energy Code Advisory Commission
and the Solar Energy Advisory Council.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director and staff of the
Arizona Department of Commerce for their cooperation and assistance throughout
this audit.
State of Arizona
page 6
Office of the Auditor General
page 7
Commerce’s functions can potentially be
eliminated, modified, or transferred
The Legislature should consider a number of options related to 13 major functions
carried out by the Department of Commerce. Four functions can be eliminated
because other programs that provide similar services already exist, or because
Commerce’s role is very limited. Four other functions are similarly duplicated else-where
and could also be eliminated, but unlike the first four, there are stronger rea-sons
for retaining these as a state function in some form. Finally, while five
Commerce functions are definitely important or unique enough to be retained, all of
them could be potentially transferred to other agencies if these remaining programs
did not constitute enough of a reason to retain Commerce.
Four functions could be eliminated
Four of Commerce’s functions can be eliminated because
other agencies can or do provide these services or because
Commerce’s role is limited or may be reduced. (See Table 2,
pages 8 through 9.)
Small Business Services
What it does—Small Business Services serves the public
primarily through an Internet-based service that provides
information on how to start a business in Arizona and
access business assistance resources, such as licensing
information or procurement opportunities within the State.
This user-friendly “virtual representative” software applica-tion
was implemented in May 2002. According to
Commerce, periodic updating takes staff about 2 hours
FINDING 1
Small Business Services
(Fiscal Year ‘03)
Staff:
4 FTE 1
Expenditures:
General Fund $ 12,400
CEDC Fund 407,700
Total $420,100
1 Does not include this function’s share of the FTE rep-resenting
the director who oversees this and other
functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the year
ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 8
Table 2 Arizona Department of Commerce Functions, FTEs, and General Fund and Commerce and Economic Development
Commission (CEDC) Fund Expenditures1, Fiscal Year 2003
Function A.R.S. Section Description FTE2 Recommendation Fund Amount
Small Business Services 41-1504 and
41-1505.08
Promotes the development of small, minority-,
and women-owned businesses through the use of
the "virtual representative" software application.
Acts as a small business advocate within state
government.
4 6 Eliminate General Fund
CEDC Fund
$ 12,400
407,700
Apprenticeship Services 41-1504 Combines on-the-job training with related
classroom instruction in cooperation with the U.S.
Department of Labor to produce skilled workers.
4 Eliminate General Fund 146,500
Pre-Apprenticeship
Services
None3 Provides training to minorities and women for
highway construction trades.
1 Transfer to ADOT 0
Economic Information
and Research
41-1504 Collects and disseminates economic data and
research.
3.8 Eliminate General Fund
CEDC Fund
361,000 4
89,500
Growing Smarter
Functions
9-461.06 and
11-806
Evaluates communities' Growing Smarter Plans,
and provides technical assistance on plans to
cities and counties.
2.26 Eliminate General Fund
CEDC Fund
9,700
124,200
International Trade and
Investment Office
41-1504 through
41-1504.02
Assists Arizona businesses to expand into foreign
markets and attracts foreign investment into the
State. Includes four international trade offices
operated under contract.
5 6 Eliminate, retain, or
ensure that fees are
assessed
General Fund
CEDC Fund
330,600
842,000
Business Attraction and
Office of Innovation
41-1504, 41-1552
through 41-1552.05,
and 41-1514.02
Markets the State to attract new and expanding
businesses, with emphasis on information
technology, aerospace, bioscience, and
environmental industries. Emphasizes Arizona’s
technology-focused entrepreneurs.
9 6 Eliminate or retain state-wide
point of contact
General Fund
CEDC Fund
539,500
541,300
Rural Development 41-1505.02 through
41-1505.03
Provides technical and financial economic
development assistance to communities.
Includes the Main Street Program and the Rural
Economic Development Initiative.
4.5 6 Either eliminate
or retain
General Fund
CEDC Fund
295,400 4
177,700
Arizona Film
Commission
None5 Encourages film business within Arizona.
Provides customer service to the film and
television industry.
2.5 6 Eliminate or retain and
combine with Office of
Tourism
General Fund 299,000
Arizona Job Training
Program
41-1541 and 41-1543
through 41-1544
Offers grants to employers for employee training.
Funded by a 0.1 percent wage tax paid by
businesses.
2 Retain but make self-sufficient
General Fund 158,200
Continued
Office of the Auditor General
page 9
Table 2 Arizona Department of Commerce Functions, FTEs, and General Fund and Commerce and Economic Development
Commission (CEDC) Fund Expenditures1, Fiscal Year 2003
Concluded
Function A.R.S. Section Description FTE2 Recommendation Fund Amount
Staff Support for the
Governor's Workforce
Development Council
41-1542 Provides staff and policy assistance for the
Governor’s Workforce Development Council.
5 Retain; or transfer to the
Department of Economic
Security
$0
Energy Office 41-1504 and 41-1509
through 41-1511
Provides energy information and policy advice to
the Governor and Legislature. Implements 17
programs to encourage energy efficiency and
renewable energy usage.
17 6 Retain; or transfer to the
Department of Housing
0
Private Activity Bond
Administration
35-901 through
35-913
Allocates the private-activity tax-exempt bonding
authority to qualified issuers.
1 Retain; or transfer
to CEDC
0
Arizona Military Airport
Regional Compatibility
Project
Laws 2001,
Ch. 318 §3
Develops land-use plans for areas around
Arizona military airports.
2.8 6 Retain or transfer to
another executive
branch agency
General Fund
CEDC Fund
12,300
177,900
Agency Administrative
functions
41-1504 Provides agency-wide assistance to Commerce
divisions and functions; also includes agency
Communications and Legislative Liaison
functions.
24.2 Retain or, if Commerce
is terminated, eliminate
General Fund 1,297,900
1 Includes only the Department’s fiscal year 2003 expenditures from the General Fund and CEDC Fund, because expenditures from other funds are from monies restricted for specific purposes.
Those other funds include the Private Activity Bond Fund, Arizona Job Training Fund, Federal Fund, and Oil Overcharge Fund. The General Fund expenditures are funded from legislative
appropriations, and the CEDC Fund expenditures are legislatively appropriated from two Arizona State Lottery games and securities fees. The Legislature can redirect these funding sources for
other purposes.
2 Full Time Equivalent (FTE) staff funded by all Department sources, including those restricted for specific purposes.
3 Pre-Apprenticeship Services has no statutory authority, but exists through interagency agreement with the Arizona Department of Transportation.
4 Excludes 2003 expenditures from a one-time appropriation received in 2002 for the Arizona Partnership in a New Economy.
5 Arizona Film Commission was not created by statute.
6 FTE total does not include the function’s share of the FTE for the director who oversees this function.
Source: Auditor General staff analysis of the Arizona Department of Commerce organization chart as of January 2003, and the Arizona Financial Information System (AFIS) Accounting Event
Transaction File for the year ended June 30, 2003..
per week. Because of cutbacks in staff since June 2002, Small Business
Services reports it is no longer able to provide one-on-one counseling.
According to Small Business Services, it interacts with the public by giving vis-itors
a guide for starting and operating a business and written directions about
how to utilize its online service, and referring callers to its Web site through a
recorded message. From July 2002 to April 2003, Commerce reports that it
received 390 walk-in contacts, answered or returned over 6,000 calls, received
600 written requests for information, had nearly 16,000 online visitors, distributed
12,000 electronic reports from its virtual representative, and followed up on 152
contacts. According to Commerce, Small Business Services also functions as a
small business advocate by facilitating open communication between the
Governor and small businesses, and by working to develop state-wide policies
related to small businesses. Finally, Small Business Services supports a variety
of minority- and women-owned business services such as the Arizona Minority
Business Development Center, a center operated by the Arizona Hispanic
Chamber of Commerce, by assisting with meetings, referrals, and outreach
activities, and by inclusion in Commerce’s Web site.
Why it can be eliminated—Various other agencies provide similar services, sug-gesting
that this function is duplicative and could be eliminated. At the federal
level, the federal Small Business Administration (SBA) provides assistance
through its network of ten small business development centers (SBDCs) locat-ed
in community colleges throughout the State. Eight of these ten SBDCs are
located in rural areas of the State, and three additional satellite centers serve the
State. In working with clients, the SBDC counselors use their own resources as
well as Commerce’s online “virtual representative” and provide one-on-one
assistance, such as making appointments by phone, taking walk-ins, and
arranging training classes at the community colleges. According to SBDC offi-cials,
over 7,000 people received small business assistance during calendar
year 2002. This includes 3,500 people who received business counseling, and
other clients who, for a minimal fee, received over 38,000 hours of business
training through the community colleges. Additionally, SBA provides financial
assistance by guaranteeing loans from lending institutions and technical assis-tance
through its women’s business centers and SCORE (Service Core of
Retired Executives). SBA’s Web site includes information about business licens-es
and tools for obtaining legal help, buying businesses and franchises, and
selecting business locations. Further, SBA operates two women’s business cen-ters
located in Phoenix and Tucson that provide information to women business
owners such as how to apply for federal contracts, finance their business, or
obtain support for women with disabilities.
Other agencies at the state and county level, as well as private organizations,
also provide similar business information. For example, Web sites with informa-tion
on state services such as business licensing and procurement information
are available from the State of Arizona’s Web site, as well as the Arizona
State of Arizona
page 10
Small Business Services
could be eliminated
because various agen-cies
also provide similar
services.
Office of the Auditor General
page 11
Corporation Commission, the Arizona Department of Revenue, and the Arizona
Department of Administration’s State Procurement Office, and several counties
have information online about doing business within their boundaries, such as
obtaining licenses for businesses. For example, the Department of Revenue’s
Web site contains information valuable to businesses, such as links to various
licensing requirements and content information for over 50 state agencies.
Additionally, for persons seeking to buy existing small businesses, business bro-kers
can assist clients by locating businesses for sale and referring them to pro-fessional
accountants and lawyers for processing financial and legal matters
pertinent to a sale. Further, libraries with business sections, such as the Phoenix
Central Library, provide databases, reference books for business owners, gov-ernment
documents, and current events listings of seminars and workshops.
Finally, business membership organizations, such as the Arizona Small
Business Association and the Arizona Chapter of the National Federation of
Independent Businesses, also advocate for the needs of small businesses.
Apprenticeship and Pre-apprenticeship Services
What it does—Apprenticeship Services’ goal is to combine
on-the-job training with related classroom instruction to
produce skilled workers. Commerce administers
Apprenticeship Services under agreement with the United
States Department of Labor by approving and registering
all apprenticeship programs in the State. Apprenticeship
Services also provides completion certificates for appren-tices
who complete a registered apprenticeship training
program and places their names in the U.S. Department of
Labor’s national database. During calendar year 2002,
Commerce reports that the State issued 461 certificates to
trained individuals allowing them to find a job in various
trades. Currently, there are more than 100 registered
apprenticeship programs in Arizona that provide training in
areas such as agriculture, fishing, mining, construction, and
communications. Individual employers, employer associations, or labor or man-agement
sponsors operate the training programs in an effort to produce highly
skilled workers to meet employer demands. In fiscal year 2003, Commerce
requested and received a 1-year allocation of $125,000 from the Governor’s
Workforce Development Council to support its operations.
Why it can be eliminated—The Legislature could eliminate Apprenticeship
Services because the federal government is obligated to provide these services
if the State does not do so and currently has staff in place that work on the pro-gram.
In 1978, Arizona petitioned the Department of Labor’s Bureau of
Apprenticeship and Training (Bureau) for the ability to administer it, even though
no federal funding accompanied the transfer of responsibility. Currently, Arizona
Apprenticeship Services
could be eliminated
because the federal
government must pro-vide
these services.
Apprenticeship Services
(Fiscal Year ‘03)
Staff:
4 FTE
Expenditures:
General Fund $146,500
Total $146,500
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 12
needs legislative reauthorization to continue its participation. However, if Arizona
does not take action, an official in the Bureau office that oversees this function
stated that the federal government will be obligated to staff the operation in order
to continue to meet the needs of businesses and workers, as it does for 23 other
states at federal expense.
If it is eliminated—If the Legislature eliminates Apprenticeship Services, it should
retain and transfer the Pre-Apprenticeship Training Program for Highway
Construction Careers to the Arizona Department of Transportation (ADOT). This
federally funded function offers a 6-week training program for minorities and
women in highway construction trades. Funded by ADOT using federal pass-through
monies, Commerce records show 79 students completed the program
during the 18-month period ending June 2002. The training curriculum includes
classes in trades such as electrical, plumbing, and carpentry and is provided by
various schools, such as the Maricopa Skill Center in Phoenix and the University
of Arizona PHASE program (Project for Homemakers in Arizona Seeking
Employment). To support this function, the U.S. Department of Transportation
periodically grants funds to ADOT, which then transfers a portion to Commerce.
For example, in fiscal year 2003, ADOT received $336,000. ADOT uses these
funds to pay the schools for training, and according to a Commerce official,
Commerce is allocated $68,000 for one FTE who reports to ADOT and is
responsible for processing the applications, advertising, and making marketing
presentations.
If the Legislature elects to transfer responsibility for the apprenticeship function
to the federal government, ADOT is the logical agency to assume responsibility
for the pre-apprenticeship function. An ADOT official said that the function was
placed in Commerce because of its close association with the apprenticeship
function. However, if the apprenticeship function is transferred to the federal
level, retaining the pre-apprenticeship function in Commerce is unnecessary.
Because the federal grant can be used to support the function, one
ADOT official stated that ADOT could assume it with no cost to the
State.
Economic Information and Research
What it does—The Economic Information and Research function acts
as the State’s central point of economic data collection and coordi-nates
research projects, including analysis of economic development
issues for the State. A.R.S. §41-1504(A) requires that Commerce con-duct
research and establish and maintain a central repository and
clearinghouse for all data relating to Arizona’s economy. Auditors inter-viewed
three individuals familiar with Commerce’s research and analy-sis
role: a lobbyist, a researcher for the Arizona Board of Regents, and
an economic consultant. All three found it valuable. Although
Economic Information and Research
(Fiscal Year ‘03)
Staff:
3.8 FTE
Expenditures:
General Fund $361,000
CEDC Fund 89,500
Total $450,500
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
The Pre-Apprenticeship
Program could be trans-ferred
to ADOT since it
provides training in high-way
construction.
Office of the Auditor General
page 13
Commerce does collect state-wide economic data and facilitate economic
research, much of this information is available elsewhere. Commerce also coor-dinates
the analysis of some of this data, such as it did in the Arizona Statewide
Economic Study 2002, funded by the Commerce and Economic Development
Commission. This study analyzed and presented the State's current economic
conditions as well as emerging trends. The research division also publishes
information such as the number of businesses in Arizona and includes on
Commerce’s Web site profiles of Arizona communities containing population
data from the U.S. Census Bureau, labor information from the Arizona
Department of Revenue, and tax rates obtained from the Arizona Tax Research
Foundation.
Why it could be eliminated—The information Commerce maintains is already
available from other sources, and some of these sources have additional eco-nomic
information and research and analysis that is unavailable from
Commerce. For example, the Department of Economic Security publishes his-torical
unemployment data as well as labor and industry employment forecasts.
Further, each of the state universities provides electronic access to information
related to Arizona’s economy. For example, Arizona State University provides
the Arizona Economic Data Center, which allows Internet users to search its
library for a variety of data, including United States Department of Commerce
economic data on Arizona. Similarly, the University of Arizona provides publica-tions
on current economic information and analysis of Arizona’s economy.
Further, Commerce’s role is generally not to perform its own research, but rather
to coordinate research conducted by other entities, such as business, govern-ment,
university, and civic groups. For example,
Commerce contracted with many industry experts for its
2002 Statewide Economic Study. Therefore, this type of
research and analysis could be conducted elsewhere.
For example, the Flinn Foundation, a private, nonprofit
foundation, commissioned an economic analysis of the
bio-science industry in Arizona, comparing Arizona with
other successful states. Since all of this information is
available to businesses, media, and the general public
over the Internet, or from private sources, Commerce’s
role of disseminating this information to the public is not
needed.
Growing Smarter Functions
What it does—Under the State’s Growing Smarter Act, all
cities and counties are required to adopt comprehensive,
long-range plans for development that address issues
such as land use, open space, growth, and water
resources. These plans are developed and adopted by
Growing Smarter
(Fiscal Year ‘03)
Staff:
2.2 FTE1
Expenditures:
General Fund $ 9,700
CEDC Fund 124,200
Interagency Agreement Fund 40,000
Total $173,900
1 Does not include this function’s share of the FTE
representing the director, who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, organization
charts as of January 2003, and data from
the State’s Human Resource Management
System. Numbers are rounded.
Economic Information
and Research could be
eliminated because the
information is available
elsewhere.
communities after receiving public comment and input from various government
agencies, including Commerce. A.R.S. §§9-461.06 and 11-806 require
Commerce to receive review copies of the plans, and any major amendments
made to existing plans, before they are adopted by the cities or counties. During
fiscal year 2002, Commerce reviewed 42 city and county plans. Commerce also
provides other services to support the State’s Growing Smarter program, such
as issuing $60,000 in grants from the Commerce and Economic Development
Commission, holding two workshops each year that assist cities and counties in
developing their plans, and providing technical assistance about Growing
Smarter to cities and counties. Auditors contacted a county development official
and a representative of the Grower Smarter Oversight Council, which performs
functions such as monitoring the progress of cities and counties in developing
their plans. Both individuals commented that Commerce provides valuable
technical assistance. Commerce also provides staff support for the Growing
Smarter Oversight Council.
Why Commerce’s participation can be eliminated—The Legislature could elimi-nate
Commerce’s participation, since its review role is only generally defined in
statute, is advisory only, and may diminish when all cities and counties have
developed their plans. Specifically, statute requires that Commerce receive a
copy of these plans and amendments for review. Statute does not describe the
extent of the review or comment. As a result, in many cases, Commerce staff
suggest wording or organizational changes for the plans submitted by the cities
and towns. However, Commerce does not have authority to require these
changes, and cities and counties may adopt their plans or amendments without
incorporating Commerce’s suggestions. Further, the majority of cities and coun-ties
are required by statute to have their plans adopted by December 31, 2003,
after which Commerce’s role will be to review major ammendments to city or
county plans, review new plans if cities or counties develop them, or review orig-inal
plans for those cities that do not have a December 31, 2003, deadline. While
this may reduce the need for Commerce’s review and technical assistance,
Commerce and the representative from the oversight council believe this will
have little or no impact on Commerce’s workload. According to this representa-tive
from the council, Commerce will continue to provide expertise and informa-tion
to cities and counties that is unavailable from any other agency.
Various options exist for four functions
The Legislature should consider a range of options for four other Commerce func-tions.
These functions could be similarly eliminated because they are largely avail-able
elsewhere, but for each of these functions, auditors also identified some advan-tages
to the State continuing to carry them out, though not necessarily through
Commerce. As a result, the discussion of these four functions includes options other
than eliminating them.
State of Arizona
page 14
Commerce’s participa-tion
related to Growing
Smarter could be elimi-nated
since its role is
limited.
Office of the Auditor General
page 15
International Trade and Investment Office
What it does—According to Commerce, the International Trade and Investment
Office (International Trade) promotes Arizona products and
services for export and markets Arizona to foreign compa-nies
as a location for expansion. The export-related pro-motional
services include counseling businesses about
marketing abroad, gathering market research, providing
assistance to businesses in finding trading partners, and
organizing trade shows and trade missions to introduce
businesses to international markets. Marketing Arizona to
foreign companies involves issuing targeted mailings,
conducting presentations, and hosting trade shows.
International Trade carries out its activities through four
contracted foreign offices located in Taiwan, Japan,
Mexico, and the United Kingdom. The offices were estab-lished
between 1987 and 1995. International Trade also
maintains an office in Phoenix, staffed by five Commerce
employees. Commerce reports that during fiscal year
2002, International Trade conducted 727 substantive
export and trade-related technical assistance sessions
that helped 333 companies, individuals, or organizations.
A technical assistance session includes a range of activi-ties,
from a telephone call to spending an entire day with a
company during a trade mission.
Auditors identified three options for this function: eliminating it entirely, retaining it, or
ensuring that Commerce charge for export promotional services as permitted by law.
Why it could be eliminated—This function could be eliminated because other
government and private entities provide some similar services. The United
States Department of Commerce, Export Assistance Centers provide export
promotional services similar to Commerce but for a fee. Two Export Assistance
Centers, located in Phoenix and Tucson, are part of a world-wide network of 150
offices in 83 foreign countries, far surpassing Arizona’s 4 foreign offices. The
Export Assistance Centers offer counseling, market research, contact facilita-tion,
and other trade promotion activities. According to a Commerce-commis-sioned
study prepared by Arizona State University’s College of Business, the
federal government might better handle some of the activities currently per-formed
by Commerce, such as export counseling, technical assistance, and
country risk analysis, and Arizona should not duplicate these efforts. Commerce
states that the Export Assistance Centers duplicate Commerce’s export promo-tional
services only at a basic level, and the two Arizona Assistance Centers do
not focus on the needs of Arizona businesses. However, a review of the prod-ucts
and services offered by the Export Assistance Centers in the four countries
where Arizona maintains a foreign office and discussions with officials knowl-
International Trade could
be eliminated since
other government and
private entities offer sim-ilar
services, or
Commerce could enact
cost-saving measures.
International Trade and
Investment Office
(Fiscal Year ‘03)
Staff:
5 FTE1
Expenditures:
General Fund $ 330,600
CEDC Fund 842,000
Total $1,172,600
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 16
edgeable of the products and services offered by the centers indicates that not
only do the centers provide services similar to Commerce, they also offer some
services that Commerce does not provide, such as video conferencing with
groups of prescreened international business prospects. Further, the Federal
Export Assistance Centers support Arizona businesses. Specifically, the man-ager
of one of these Centers estimates that 90 percent of his time is focused on
Arizona companies.
One difference between the Export Assistance Centers and Commerce, howev-er,
is that whereas Commerce’s services are free, the Export Assistance Centers
charge for their services. For example, scheduling 4 to 5 one-on-one appoint-ments
with selected potential business partners in Mexico, including the servic-es
of an escort/interpreter, is $600 a day.
Additionally, private consultants, such as Ernst & Young, provide export assis-tance
to businesses for a fee. Further, export assistance is available to Arizona
businesses through the Tucson-Mexico Trade Office, operated by the City of
Tucson, to those businesses working with Mexico.
Why it might be worth continuing—Commerce maintains that International Trade
should be retained for two main reasons;
􀁺􇩎 No other marketing entity for business expansion into Arizona—Commerce
points out that no other entity markets Arizona to foreign companies as a
location to expand their businesses. However, it was not until fiscal year
2002 that Commerce separately reported the number of foreign companies
that relocated to the State. That year, Commerce reported that two interna-tional
companies moved to Arizona.
􀁺􇩏 Other programs not focused solely on Arizona—Commerce states that the
Export Assistance Centers do not work solely on behalf of Arizona busi-nesses.
However, according to the manager of the Tucson Export
Assistance Center, the centers located specifically in Arizona focus on
Arizona companies. Further, it appears that nothing precludes a center from
being able to work effectively for multiple clients. For example, while
Commerce’s contracted foreign offices do not work for other states, the
European office does work for multiple businesses, as well as Commerce.
How it could be retained but modified—The Legislature could also consider a
third alternative for this function—retaining the current four offices and directing
Commerce to enact cost-saving measures, including charging for a portion of
the costs of export promotional services as permitted by law. Although A.R.S.
§41-1504.01 currently authorizes Commerce to assess fees to businesses for
export promotional services, Commerce has not charged such fees. Commerce
does charge for participation in trade shows and trade missions; however, these
fees pertain only to the cost of the show or mission. According to Commerce, in
fiscal year 2002, it collected $49,000 for these events. Commerce does not
Office of the Auditor General
page 17
charge companies when it arranges meetings with foreign companies, or to
develop company-based economic research. The federal Export Assistance
Centers charge for their services. A United States Department of Commerce offi-cial
explained that, while these fees are less than the full cost of the services pro-vided,
charging a fee separates out the truly export-ready companies from those
who are not serious.
Business Attraction and Development and Office of Innovation,
Technology, and Entrepreneurship
What it does—Business Attraction and Development (Business Attraction) mar-kets
the State nationally and internationally to attract new and expanding busi-ness
development with an emphasis on four industries
that Commerce has identified as a priority: information
technology, aerospace, bioscience, and environmental
technology. Four full-time employees within Business
Attraction in Phoenix work with the four targeted industries
to encourage new businesses to locate within the State
and to assist existing businesses to expand, while two full-time
employees in the State’s northern and southern areas
work with businesses seeking to locate or expand there.
Business Attraction also acts as the primary state-wide
contact for businesses seeking information about relocat-ing
to the State. According to one Commerce official,
when a business calls, Commerce does one of two things,
depending on whether the business wishes to locate in a
metropolitan or a rural area of the State. For businesses
seeking to locate in a metropolitan area, Commerce refers
the call to a local economic development entity, such as
the Greater Phoenix Economic Council, and may also pro-vide
additional assistance, such as providing technical
assistance or additional information as necessary. For
businesses seeking to locate in a rural area, Commerce actively assists the busi-ness
by showing them potential sites for relocation, educating them on business
incentives and lifestyle, and arranging appointments with economic develop-ment
groups to discuss issues such as labor availability. In this way, Commerce
concentrates on assisting rural communities who might not be as well equipped
as metropolitan areas to handle business attraction and retention efforts.
According to Commerce, the Office of Innovation, Technology, and
Entrepreneurship (Office of Innovation) provides special emphasis to Arizona’s
technology-focused entrepreneurs. In October 2002, the Office of Innovation
was awarded a federal Small Business Innovative Research (SBIR) grant to cre-ate
an Arizona Federal and State Technology Transfer Program (AZFast). The
program, scheduled to be completed in September 2003, uses $100,000 in fed-
Business Attraction and
Office of Innovation
(Fiscal Year ‘03)
Staff:
9 FTE1
Expenditures:
General Fund $ 539,500
CEDC Fund 541,300
Total $1,080,800
1 Does not include this function’s share of the FTE rep-resenting
the director who oversees this and other
functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the year
ended June 30, 2003, and organization charts
as of January 2003. Numbers are rounded.
State of Arizona
page 18
eral funds and is matched by $100,000 from the Commerce and Economic
Development Commission. These funds are used for workshops and education
to promote technology transfer, research, and development in Arizona.
Auditors identified two options for this function: eliminating it entirely or retaining the
function only as a central point of contact for businesses outside the State seeking to
locate in Arizona.
Why it could be eliminated—There are two main reasons why this function could
be eliminated:
􀁺􇩓 Similar services are provided elsewhere—Many of the services that
Business Attraction and the Office of Innovation provide are available from
other local and private development agencies. For example, there are
approximately 300 local and state-wide economic development organiza-tions
throughout Arizona, including the Greater Phoenix Economic Council,
which provides assistance to businesses locating in Arizona, including
identifying potential real estate sites. Other entities represent Tucson, Yuma,
and Flagstaff; and rural organizations, such as the Graham County
Chamber of Commerce and the Parker Area Economic Development
Committee, represent their respective areas. Further, major utilities within
the State have economic development programs, including Arizona Public
Services’ (APS) Building Bridges to Businesses program. This program
focuses on business retention and expansion services, generally within the
geographic area served by APS. Similarly, Salt River Project (SRP) works
with local economic and regional development groups, including the
Greater Phoenix Economic Council, to provide information on electric rates
and service availability to businesses seeking to locate in Arizona.
􀁺􇩒 Research suggests limited impact—Research suggests that state-operat-ed
economic development efforts have a limited impact. Specifically, one
report noted that economic development and employment generation is
more likely to be successful if initiated at the community and local level
rather than elsewhere.3 However, even efforts carried out at the local level
may not be effective.4 One research effort that specifically measured the
impact of state development organizations like Commerce concluded that
state agencies promoting economic growth had no impact on wage growth
in their states.5 The most important factors in economic growth (labor
costs, availability of skilled labor, and natural resources, energy cost, and
climate) are beyond the control of state and local governments.6 A recent
study conducted by Elliott D. Pollack and Company for the Department of
Commerce notes that Commerce helped to attract to Arizona or assisted
190 companies between July 1999 and June 2002.7 However, expansions
Business Attraction and
Office of Innovation
could be eliminated, or
retained with a state-wide
point of contact.
Office of the Auditor General
page 19
such as those by Cox Communications and Wells Fargo Home Equity
Group were identified as being in the 190 assisted by Commerce.
Moreover, the study did not explore whether these businesses would have
expanded with or without Commerce’s efforts.
How it could be retained, but modified—An alternative to eliminating the function
entirely would be to retain only a central point of contact for businesses seeking
to locate in Arizona, thereby eliminating such functions as showing businesses
potential sites for relocation and arranging appointments for businesses with
local economic development groups. The central point of contact function is
important, because economic development officials contacted during the audit
reported that businesses prefer to work with a neutral, state-wide contact that
can provide impartial information about potential sites and answer questions
about a state’s business climate. Similarly, a Commerce official explains that
Chambers of Commerce cannot carry out this function, since these organiza-tions
work on behalf of their member businesses. The central point of contact
function could be provided either through individuals who answer businesses’
telephone calls and direct them to local economic development entities, or
through information maintained on a Web site. However, it would not provide in-depth
services to individual businesses. For example, it would no longer provide
site selection services for business wishing to relocate. Instead businesses
could obtain these services through local economic development groups or
other agencies.
Rural Development
What it does—Rural Development provides technical and
financial assistance to rural communities for downtown
revitalization, economic development, and business
retention and expansion. The function operates two main
grant programs: Main Street and the Rural Economic
Development Initiative (REDI). Main Street, which in fiscal
year 2004 is authorized to issue $130,000 in grants from
CEDC funds, offers both financial and technical assis-tance
to rural communities seeking to revitalize their
downtown business districts under an initiative developed
at the federal level. Communities wishing to participate in
Main Street must have a population of fewer than 50,000;
commit to employing a full-time project manager; commit
to a long-term operating budget; and have a downtown
association. Commerce has verified that 19 Arizona com-munities
met these requirements as of November 2002
and are, therefore, eligible to pursue state Main Street
monies to assist a variety of local projects. Specifically,
during fiscal year 2002, the largest grant, approximately
Rural Development
(Fiscal Year ‘03)
Staff:
4.5 FTE1
Expenditures:
General Fund $295,400
CEDC 177,700
Federal Fund 259,000
Total $732,000
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Error is due to
rounding.
State of Arizona
page 20
$23,000, helped support a training program for nonprofit and Main Street board
members. Additionally, according to one city official, Commerce awarded the
Casa Grande Main Street program $1,200 to hire an architect to prepare draw-ings
combining three buildings owned by Sun State Bank into one. Once the
architectural drawings were complete, the Bank proceeded with the remodeling
project. The REDI grant program, which in fiscal year 2004 is authorized to issue
a total of $45,000 in matching grants, offers both technical and financial assis-tance
to rural communities to develop an economic development program or
project and evaluate community resources. Similar to Main Street, Commerce
had approved, as of February 2003, 17 local governmental entities as qualified
under REDI to compete for funds provided by the CEDC. To qualify, communi-ties
must demonstrate a commitment to economic development from the com-munity
and maintain a governing body to administer funds. Projects range from
upgrading software to conducting market feasibility studies.
Auditors identified two options for this function: eliminating it entirely or retaining it.
Why it could be eliminated—Funding and technical support is available to rural
communities from other sources. For example, the State Historic Preservation
Office (SHPO) offers a local government assistance program that allows Arizona
political subdivisions to apply to become Certified Local Governments. As of
March 2003, there were 26 Certified Local Governments. Once certified, these
entities are eligible for specialized assistance and grant funds for developing
their own local preservation programs. In the year ending June 30, 2002, SHPO
awarded nine such grants totaling more than $370,000.
In addition, private fund-raising efforts have created funding for some rural
development projects, although these efforts would need to increase if the
Commerce Main Street program were eliminated. For example, the City of Casa
Grande’s Main Street program recently raised $10,400 to supplement the
$5,000 it received from Commerce’s Main Street program and the funding it
received from other sources in order to build a new marquee for a building orig-inally
constructed in 1929. However, a Casa Grande Main Street official noted
that without the funding it received from Commerce, the Casa Grande Main
Street program would have had to raise the $5,000 itself, thus taking longer to
complete the project.
Why it might be worth continuing—While the Legislature could eliminate the
Rural Development function and redirect the General Fund and CEDC monies
for other purposes, the communities that Rural Development assists view the
function as valuable. Without Main Street and REDI, these communities might
not be able to carry out some projects, while other projects would take longer
due to the need to locate other sources of funding. A Commerce official
Office of the Auditor General
page 21
acknowledged that some efforts that Main Street and REDI support in the rural
communities could survive without Commerce, but notes that Commerce lever-ages
the communities’ efforts with the assistance offered by these grant pro-grams.
Arizona Film Commission
What it does—The Arizona Film Commission provides free
support to film and television production companies work-ing
in Arizona, including location scouting, permit process-ing,
and liaison services. Commerce reports that, during
fiscal year 2002, 92 projects were filmed in Arizona, while
the Film Commission assisted 455 projects in some way.
In light of recent state budget cuts, the Film Commission
has already halted marketing efforts to bring film projects to
the State, a function it performed for many years. The Film
Commission now focuses on providing customer service to
the production companies who have approached the State
on their own.
Auditors identified two options for this function: eliminating it entirely or combining it
with the Office of Tourism.
Why it could be eliminated—There are two main reasons why this function could
be eliminated:
􀁺􇩓 Similar services are available from private sources—Similar customer serv-ice
functions are available to production companies from private sources
for a fee. The Arizona Production Association (APA) publishes an annual
state-wide directory listing verified production personnel, such as location
scouts, costume designers, and hair stylists whose services are available
to production companies for a fee. The directory also includes contact infor-mation
for local chambers of commerce and film commissions, information
on Arizona’s child labor laws, and motion picture industry tax incentives.
This directory is free to APA members, but costs $20 for nonmembers.
􀁺􇩓 Similar services are available from local film offices—Additionally, 22 film
offices throughout the State, in communities such as Benson, Kingman,
and the Navajo Nation, provide similar free services as the Film
Commission. Larger cities, such as Phoenix, also promote through the
City’s Web site that they offer scouting and liaison services, as well as infor-mation
on accommodations, equipment, and crew. The Tucson Film Office
also provides production manuals that include professional crews and
information regarding local suppliers and filming in Tucson.
Film Commission servic-es
are also provided by
private sources and
local film offices.
Arizona Film Commission
(Fiscal Year ‘03)
Staff:
2.5 FTE1
Expenditures:
General Fund $299,000
Total $299,000
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 22
Why it might be worth retaining but combining with the Office of Tourism—The
Legislature could consider retaining the Film Commission, but transferring it to
the Office of Tourism (Tourism). Commerce maintains that the Film Commission
should be retained because it generates revenue through dollars spent by pro-duction
companies filming in the State, far exceeding the Office’s $300,000
budget. However, Commerce takes credit for revenue generated that is not
directly attributable to its efforts. Commerce also claims that many states and
countries aggressively compete for these film production company dollars, and
if the Film Commission is eliminated, these dollars will go to the more aggres-sive
states and countries. However, many factors influence production compa-nies
to film in a particular location, including scenery, production costs, and
availability of lodging. The actual impact of a state film commission is difficult to
separate from these other factors. Finally, Commerce maintains that films shot
in Arizona encourage tourism and bring more tourist dollars to the State.
However, a variety of factors influence tourists to visit Arizona, one of which may
include a film produced here.
If the Legislature elects to retain the Film Commission, it should consider trans-ferring
it to the Arizona Office of Tourism, since both entities emphasize enhanc-ing
the State’s visibility. An Office of Tourism official explained that the two
groups have explored merging in the past, and the official agreed that their mis-sions
fit together. In fact, this official notes that the main industry in rural Arizona
is tourism. Moreover, Tourism is already involved in working with noncommercial
film projects in Arizona. For example, Tourism helps organize tours of potential
film locations for photographers or film producers. In addition, Tourism maintains
a collection of photographs that are distributed to companies planning to film in
Arizona.
Other major functions should be retained
Commerce’s remaining five functions should be retained, as these functions play a
role in providing valuable services to Arizona businesses, workers, cities, and coun-ties,
or do not require state appropriations. The Legislature could retain some or all
of these functions within Commerce; however, should the Legislature elect to elimi-nate
or transfer the eight major functions discussed above, then the Legislature could
sunset Commerce. If it elects to take this step, the Legislature should retain these five
needed functions, transferring them to other state agencies, and consider eliminat-ing
nearly $1.3 million in appropriations for agency administrative functions and the
associated FTEs. These functions are as follows:
The Film Commission
could be combined
with the Office of
Tourism.
Office of the Auditor General
page 23
The Arizona Job Training Program
What it does—The program’s objective is to provide funding for job training
assistance to Arizona businesses in the form of 2-year
grants. To qualify, an Arizona business is required to match
the employee training grant expenditures in an amount
equal to 25 percent for new employees and 50 percent for
existing employees. Training can be provided by an
employer training program or by public or private higher
education institutions. During fiscal year 2003, Commerce
reports that it awarded 67 new grants, awarded over $12
million, and anticipated training nearly 21,000 workers.
Further, the program emphasizes the needs of rural and
small businesses. Specifically, A.R.S. §41-1544 reserves 25
percent of the grants for rural businesses and 25 percent
for businesses with fewer than 100 workers. The program
uses the Arizona Job Training Fund for grants funded from
a 0.1 percent employer-paid wage tax and a General Fund
appropriation for operating costs estimated to be nearly
$200,000 in fiscal year 2003. As of June 30, 2003, the Fund
had a balance of approximately $26 million, although according to Commerce,
most of this balance is committed to ongoing projects.
Why it is worth continuing, how it could be modified, and where it might be trans-ferred—
The Legislature should retain this function but eliminate General Fund
support for it and make it self-funding, because it is a unique function funded
primarily by business that is intended to improve workforce effectiveness. While
the function currently receives operating support from the General Fund, there
is no statutory requirement that the Legislature appropriate any money for it. The
function could be self-funding, by using monies in the Job Training Fund for
operating costs. Moreover, if Commerce is eliminated, this function could be
transferred to DES, which operates the majority of the State’s other job-training
programs. In fact, federal policies support transferring this function to DES.
Specifically, the Workforce Investment Act of 1998 encourages states to com-bine
separate workforce training programs such as those administered by DES
and Commerce’s Job Training Program in order to better coordinate state work-force
activities.
Staff Support for the Governor’s Workforce Development Council
(Council)
What it does—The Workforce Policy Office reports that it provides staff and poli-cy
assistance for the Council, and the Director of Commerce or his designee
serves as one of its members. The Council is mandated by the federal Workforce
Investment Act of 1998 (WIA), which requires that every state adopt a board to
The Arizona Job Training
Program should be
made self-sufficient.
Arizona Job Training Program
(Fiscal Year ‘03)
Staff:
2 FTE
Expenditures:
General Fund $ 158,200
Job Training Fund 9,485,400
Total $ 9,643,600
Fund Balance:
Job Training Fund $26,000,000
Total $26,000,000
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
years ended June 30, 2002, and June 30,
2003, and organization charts as of January
2003. Numbers are rounded.
State of Arizona
page 24
develop policies and support the implementation of a state-wide
system that will effectively and efficiently prepare partici-pants
for work. The Council meets this requirement by devel-oping
guidelines for program operations and allocation
formulas for the distribution of approximately $48 million in
funds provided by the U.S. Department of Labor. Specifically,
the Act requires the Council to develop and continuously
improve a state-wide system of employment and training activ-ities
primarily administered by DES that are dedicated to adult,
dislocated workers and youth. In addition, during fiscal year
2003 Commerce was eligible for up to approximately $110,000
in grant monies from DES. These monies were used for staff
and costs associated with educating faith-based organizations
about the WIA program. Further, the Council provides federal
monies to Commerce to pay for the Workforce Policy staff.
Why it is worth continuing and where it might be transferred—The Legislature
should consider retaining staff support for the Council because the federal gov-ernment
requires the Council. The Council allocates federal monies to support
programs that improve the quality of the State’s workforce. However, if the
Department were eliminated, staff support for the Council could be provided by
another agency, such as DES. Not only does DES receive the majority of the WIA
funds for its programs, but it also records and reports performance measures
for the federal government. Further, there may be value in
aligning workforce programs such as those funded by the
Council with others that DES currently administers. Although
some Council members do not support a transfer of the
Council to DES because they indicate that DES has not
always worked well with the Council, one official within DES
indicated that it could provide staff support for the Council
using the current $315,000 it provides to Commerce for esti-mated
staff expenditures.
Energy Office
What it does—The Energy Office provides energy policy
advice to the Governor and the Legislature, and implements
17 programs to encourage energy efficiency and renewable
energy usage, including the federal Low-Income
Weatherization Assistance Program, which provides grants
to reduce energy costs for low-income households.
Commerce reports that in 2002 this program helped 695
Arizona homes become more energy efficient. Commerce
uses 17 full-time staff to carry out all of the Energy Office’s
duties.
Staffing for the Council
should be retained and
could be provided by
DES or another agency
if the Legislature elimi-nates
Commerce.
Staff Support for the Governor’s
Workforce Development Council
(Fiscal Year ‘03)
Staff:
5 FTE
Expenditures:
Federal Fund $ 957,900
Interagency Agreement Fund 257,500
Total $1,215,400
Source: Auditor General staff analysis of the
Arizona Financial Information System
(AFIS) Accounting Event Transaction File
for the year ended June 30, 2003, and
organization charts as of January 2003.
Numbers are rounded.
Energy Office
(Fiscal Year ‘03)
Staff:
17 FTE1
Expenditures:
Federal Fund $ 3,739,800
Oil Overcharge Fund $ 8,624,600
Total $12,364,400
Fund Balances:
Federal Fund $ 933,600
Oil Overcharge Fund $ 6,042,500
Total $ 6,976,100
1 Does not include this function’s share of the FTE rep-resenting
the director who oversees this and other
functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the years
ended June 30, 2002, and June 30, 2003, and
organization charts as of January 2003. The
Department provided the Federal Fund fund
balance as of August 26, 2003. Numbers are
rounded.
Office of the Auditor General
page 25
Why it is worth continuing and where it might be transferred—The Legislature
should consider retaining the Energy Office because it expects to receive
approximately $5 million in fiscal year 2003 from the federal government and
uses no state monies. However, if the Legislature elects to eliminate Commerce,
it could transfer the Energy Office to the Arizona Department of Housing. The
Department of Housing separated from the Department of Commerce in
October 2002 when Housing began operating as a cabinet-level department.
Housing’s mission is to facilitate affordable housing in Arizona, and officials from
this new department agree that the Energy Office’s role in reducing buildings’
energy consumption could fit well within their mission.
Private Activity Bonds
What it does—By complying with Title 26 of the Internal Revenue Code, every
state may allocate authority for issuing tax-exempt private activity bonds among
bond issuers in an amount dependent upon its population. The Arizona maxi-mum
for 2002 was approximately $400 million, estab-lished
by using an allowance of $75 per state resident.
Statute allows the allocation to be made to bond issuers,
who are generally county or municipal industrial develop-ment
authorities, for specific purposes. For example, 35
percent can be allocated to mortgage revenue bonds, 10
percent to residential rental projects, 20 percent to stu-dent
loan projects, 15 percent to manufacturing projects,
and 10 percent to be used at the discretion of the Director
of Commerce. According to Commerce officials, this dis-cretion
supports economic development projects. Since
1984, the Department of Commerce has been responsi-ble
for processing applications and distributing this bond-ing
authority among local governments under a lottery
process starting at the beginning of each calendar year and defined by A.R.S.
§§35-901 through 35-913. This function is not supported by the General Fund
but instead is funded by user fees from those applying for the bonding authori-ty.
For example, according to Commerce, in fiscal year 2002 application and
confirmation fees amounted to over $129,000.
Why it is worth continuing and where it might be transferred—The function should
be retained since it allows bond issuers to issue tax-exempt bonds to make
funds available to private users for projects within the State’s counties and cities.
In addition, the function is not only self-funding but periodically contributes some
revenue to the General Fund through forfeiture fees. For example, according to
Commerce in fiscal year 2002, over $119,000 was transferred to the General
Fund. Should the Legislature eliminate the Department of Commerce, this func-tion,
with its one FTE, could be transferred to any agency familiar with bond proj-ects.
According to Commerce officials, the Commerce and Economic
Development Commission, a commission that serves the State by investing in
state-wide economic projects, could administer this function.
Private Activity Bonds
should be retained and
could be transferred to
CEDC if the Legislature
eliminates Commerce.
Private Activity Bonds Administration
(Fiscal Year ‘03)
Staff:
1 FTE
Expenditures:
Bond Fund $241,900
Total $241,900
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
The Office should be
retained and could be
transferred to the
Department of
Housing.
State of Arizona
page 26
Arizona Military Airport Regional Compatibility Project
What it does—The project meets with local communities and base offi-cials
to develop comprehensive land-use plans around Arizona military
airports. According to Commerce, the Legislature created the project
through a one-time appropriation of approximately $450,000, and dedi-cates
an estimated $12,300 each year in appropriations for administra-tive
costs. Commerce used these monies for a consultant who helped
draft a land-use plan for Luke Air Force Base and the surrounding area.
The plan attempts to balance the needs of the community while limiting
urban encroachment on the base. Commerce completed the plan for
Luke Air Force Base in March 2003. While approximately $450,000 from
the General Fund was used to develop this plan, Commerce used a por-tion
of the appropriation as matching funds to obtain an additional
approximately $450,000 grant from the United States Department of
Defense’s Office of Economic Adjustment. The federal grant will be used
to develop plans for Luke Air Force Base’s Auxiliary Field 1, Davis-
Monthan Air Force Base in Tucson, the Barry M. Goldwater Range and its
Gila Bend Auxiliary Airfield; review a current plan for the Marine Corps Air
Station in Yuma; and develop a policy guidebook to benefit planning for
all Arizona communities. Commerce anticipates it will complete these
efforts in 2006.
Why it is worth continuing and where it might be transferred—The Legislature
should retain this function because it is valuable to look at air base land use from
a state-wide perspective. Developing a land-use plan for military air bases and
their air access corridors is important at the state level, because local jurisdic-tions
can adopt differing policies and procedures toward encroachment on mil-itary
bases that must be combined. Activities at Luke Air Force Base, for exam-ple,
involve eight cities and two government agencies. Further, 15 cities and 2
counties endorsed the state-wide project.
If Commerce were eliminated, this function should be transferred to another
executive branch agency. According to a representative of the Department of
Defense, the federal government would insist that the current project grant be
managed by an executive agency under the Governor’s authority. Without this,
the grant could be suspended, and the Department of Defense would examine
the possibility of issuing separate grants for each of the local jurisdictions.
The Project should be
retained and could be
transferred to another
executive branch
agency if the Legislature
eliminates Commerce.
Arizona Military Airport Regional
Compatibility Project
(Fiscal Year ‘03)
Staff:
2.8 FTE1
Expenditures:
General Fund $ 12,300
CEDC Fund 177,900
Total $190,300
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the
Arizona Financial Information System
(AFIS) Accounting Event Transaction File for
the year ended June 30, 2003, organiza-tion
charts as of January 2003, and data
from the State’s Human Resources
Management System. Error is due to
rounding.
Agency Administrative Functions
What it does and why it could be eliminated—Agency
administration offers management guidance and agency-wide
assistance to its divisions and functions.
Administrative functions include the Director’s Office,
human resources, accounting and budget communica-tions,
and information technology. If the Legislature termi-nates
Commerce, these functions would not be needed
and therefore could be eliminated.
Office of the Auditor General
page 27
Commerce Administrative Functions
(Fiscal Year ‘03)
Staff:
24.2 FTE
Expenditures:
General Fund $1,297,900
Federal Fund 386,300
Oil Overcharge Fund 101,400
Total $1,785,700
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Transaction Extract File for the
year ended June 30, 2003, and organization
charts as of January 2003. Error is due to
rounding.
Recommendations
1. The Legislature should consider eliminating the following Department of
Commerce functions, since, to some extent, they duplicate programs operated
by other entities:
􀁺􇩓 Small Business Services.
􀁺􇩁 Apprenticeship Services.
􀁺􇩅 Economic Information and Research.
􀁺􇩇 Growing Smarter functions.
2. If the Apprenticeship Services function is eliminated, the Legislature should con-sider
transferring the Pre-Apprenticeship Services to the Arizona Department of
Transportation.
3. The Legislature should consider options for addressing the following functions:
􀁺􇩉 International Trade and Investment Office—The Legislature could eliminate
funding for this function, retain it, or, similar to a federal program, charge
businesses for these services to help it recover a portion of its costs.
􀁺􇩂 Business Attraction and Office of Innovation—Legislature could eliminate
this function, or retain some or all functions within this function.
􀁺􇩒 Rural Development—The Legislature could eliminate or retain this function.
􀁺􇩁 Arizona Film Commission—The Legislature could eliminate this function, or
transfer it to the Arizona Office of Tourism.
4. The Legislature should consider eliminating General Fund support for the
Arizona Job Training Program.
5. While the Legislature could elect to retain the eight programs above, should it
eliminate or transfer these functions, it could also elect to sunset Commerce. If
Commerce were sunset, the following five functions should be retained and
could be transferred to other state agencies:
􀁺􇩔 Transfer the Arizona Job Training Program’s administration to the
Department of Economic Security.
􀁺􇩔 Transfer staff support for the Governor’s Workforce Development Council to
the Department of Economic Security.
􀁺􇩔 Transfer the Energy Office to the Arizona Department of Housing.
􀁺􇩔 Transfer administration of tax-exempt private activity bonds to the
Commerce and Economic Development Commission.
􀁺􇩔 Transfer responsibility for the Arizona Military Airport Regional Compatibility
Project and its federal Department of Defense grant to another executive
branch agency.
6. If the Legislature elects to terminate Commerce, it should also eliminate
Commerce’s administrative functions.
State of Arizona
page 28
Legislature should consider evaluating tax credit
programs before they are renewed or altered
Since research suggests Commerce’s tax credit programs are likely ineffective, the
Legislature should consider requiring an analysis of the cost-effectiveness of
Enterprise and Military Reuse Zones before they are renewed, and requiring similar
cost-effectiveness evaluations before modifying other Commerce-administered
credits, or adopting new ones. At the same time, the Legislature should modify the
Department of Revenue’s (Revenue) statutes to make it easier to determine how
much the credits are costing the State in terms of foregone tax revenue. While these
programs provide several different types of tax credits, businesses have used at least
$65 million in income tax credits alone for tax years 1994 through 2000, and hold an
additional estimated $60 million in credits that can be used on future returns.
However, recent research of many other states’ tax incentive programs concludes
that tax incentives are of limited effectiveness in attracting businesses or creating
jobs. In fact, research has shown that other factors, such as the availability of a skilled
workforce and infrastructure, are far more important in influencing business location
and job creation than tax incentives. In addition, tax incentive programs are costly for
states to operate, and can lead to other unintended consequences.
Commerce administers five tax credit programs
Tax credits are one way that states have historically tried to induce economic growth.
States have relied on a variety of methods to promote economic growth, including an
overall low corporate income tax rate, direct subsidies, modifying the corporate
income tax code, and providing specific, targeted incentive programs to promote
certain types of behavior. This finding examines five targeted tax credit programs
administered by Commerce. The Department of Commerce administers five statuto-rily
created incentive programs designed to encourage business location, invest-ment,
and job creation (see Table 3, page 31 for a summary of these credits, and
Appendix for a broader description of them). Through Commerce’s programs, busi-
Office of the Auditor General
FINDING 2
page 29
nesses are given an incentive to locate in Arizona; create new jobs; invest in new
machinery, equipment and inventories; or re-use and re-tool their existing facilities.
States have historically attempted to attain these goals by simply adjusting corporate
tax rates or through targeting the tax credits to a firm, an industry, a geographic area,
or a combination of the above.
Commerce shares responsibility with Revenue for administering the income tax por-tions
of these five incentive programs, although as seen in Table 3 (see page 31),
there are other tax incentives, such as property tax and sales tax benefits, also asso-ciated
with these programs. To qualify for these programs, companies must demon-strate
to Commerce that they meet specific statutory criteria. After Commerce’s
approval, the company completes a Revenue income tax credit form that is
processed with the company’s tax return. Because Commerce does not have
access to companies’ income tax returns, Commerce requires companies to notify
them of the amount of credits claimed. According to Revenue, for tax years 1994
through 2000, companies have used these credits to claim at least $65 million in
income tax credits.8 Revenue also indicates that at the end of tax year 2000, busi-nesses
held an estimated $23.4 million in unused credits from three of the
Commerce-administered tax incentive programs, and an estimated $36.2 million in
unused credits from the Environmental Technology Assistance Program as of tax
year 1998, the most recent year for which the balance is available for this program.
These unused credits can be carried forward and used on future tax returns.
Research indicates that tax incentives induce only limited
economic growth
As noted below, recent research does not support the overall use of tax incentives to
enhance economic development. Literature suggests that, in general, modifying
taxes to induce economic growth is not likely to be efficient or cost-effective. In par-ticular,
targeted tax incentives, such as those offered to firms located in a specified
geographic area such as an enterprise zone, may attract capital investments, but
have little impact on employment. Tax incentives play a small role in the costs con-sidered
by business when locating, relocating, or expanding. Numerous other fac-tors,
such as education and infrastructure costs, outweigh the role of taxes.
Moreover, zones have not proven to be a cost-effective means of producing jobs,
and tax incentives can also lead to unintended consequences.
Taxes have limited impact on economic development—Many
researchers have assessed whether taxes have an effect on economic growth.9 In
general, modifying taxes is considered to have a small impact on economic activity.
Specifically, while one researcher estimates that reducing the tax rate from 2 percent
to 1.8 percent (10 percent) would result in a 2.5 percent increase in business activi-
State of Arizona
page 30
Office of the Auditor General
page 31
Program Purpose Incentive Amount
Encourage businesses to locate or expand in areas with high
unemployment and poverty rates or in Arizona counties with low
populations
Enterprise Zone Income Tax Credit Offers up to $3,000 for each net new job created
Attract manufacturers that are independently owned by one or
more women or minorities, or independently owned by an
employer with fewer than 100 employees, to invest in locations
with high unemployment and poverty rates
Property Reclassification Reclassifies primary and real personal property taxes for up
to 5 years
Help defense contractors obtain Department of Defense
contracts, diversify into commercial markets, and adopt new
manufacturing techniques
Income Tax Credit Offers a credit of up to 40 percent of real and personal
property taxes paid based on the number of net new jobs
created
Income Tax Credit Provides $7,500 over a 5-year period for each net new job
created
Defense Contractor
Restructuring Assistance
Accelerated Write-off Subtracts amortization from taxable income at a faster rate
Encourage the development of an environmental
technology industry, recruit and expand environmental
technology companies, and encourage the use of
environmental technology products
Income Tax Credit Allows employers to deduct 10 percent of qualified capital
investment from their income tax. Credit can be carried
forward 15 years
Property Tax Assessment Reduces property tax assessment ratio from 25 percent to 5
percent of full cash value for real and personal property for
20 years
Environmental Technology
Assistance
Sales and Use Tax
Exemptions
Offers a 10-year sales tax exemption for machinery,
equipment, materials and other tangible property used to
construct a qualified facility; a 15-year sales tax exemption
for energy sources such as electricity, fuel, or artificial gas
directly used for environmental technology manufacturing,
producing, or processing
Lessen the impact of military base closures and to create
jobs and make capital investments in the aerospace and
aviation industries
Property Reclassification Reclassifies personal property in the reuse zone,
representing up to 80 percent property tax savings for 5
years
Sales Tax Exemption Provides an up to 10-year sales tax exemption for many
types of construction performed by eligible companies
Military Reuse Zone
Income Tax Credit Provides up to $10,000 over a 5-year period for each new
employee
Information Technology
Training
Encourage employers to provide their employees with
continuing technology skills training
Income Tax Credit Provides up to $1,500 income tax credit for offering
technology skills training
Source: Arizona Revised Statutes and Department of Commerce documentation.
Table 3 Commerce-Administered
Tax Incentive Programs
State of Arizona
page 32
ty above what would have occurred without the reduction,10 other analysts suggest
the effect is much less significant.11 Another study, for example, estimates that if busi-ness
taxes were increased by 17.8 percent, the average county in their study would
lose less than one small firm and approximately 1.14 employees.12 While
researchers generally conclude that taxes have a statistically significant effect on
economic activity, they also agree the effect is small.13
Researchers conclude that targeted tax incentives such as the type offered through
enterprise zones have a similarly small effect on economic activity.14 Enterprise zones
offer incentives when businesses locate to a certain geographic area and the cred-its
are designed to create jobs and encourage investment in capital and machinery.
Arizona also offers incentives targeted to specific industries, such as helping the
defense industry and encouraging the development of an environmental technology
industry. In terms of types of incentives offered, however, enterprise zones are little
more than geographically targeted versions of standard state and local economic
development programs.
The targeted tax incentive literature and specifically, enterprise zone literature,
Commerce’s largest tax credit program as measured by the number of tax credits
used, shows that zones and the various tax incentives offered to firms located in the
zones have almost no effect on economic growth. One study, for example, estimat-ed
that the average enterprise zone reduced the tax burden on new investment by
19 percent; however, the evidence from the enterprise zone literature does not sup-port
significant differences in growth rates in zones versus nonzones, despite such
reductions in the tax burden.15 Regardless of how economic growth has been meas-ured,
such as firm births, firm relocates, firm expansions, income per capita, unem-ployment
rates, or number of jobs created, no significant impact was found for these
outcomes.16 Another study noted that enterprise zones may affect where companies
locate and may shift the investment from machinery to inventories. However, if a goal
is to improve employment of residents, as it is with three of the five programs admin-istered
by Commerce, the evidence suggests that residents are not measurably bet-ter
off in terms of income per capita or employment.17 In fact, one recent study of 36
Ohio businesses compared the job growth of businesses accepting state tax incen-tives
to those not accepting them. The study found that providing incentives actual-ly
resulted in 20 percent fewer jobs, or 10.5 jobs per firm, as compared with firms that
did not accept incentives. The authors suggest that firms misrepresent their hiring
plans to receive larger incentives from government.18
Other factors more important than taxes in economic development—
While taxes and targeted incentives play a small role in economic development,
researchers point to other factors that are far more important in business investment
decisions, most of which are beyond the control of state and local governments.19
For example, one researcher estimated that the labor market has 14 times more
impact on a business than incentives such as tax and other economic development
incentives.20 Additional factors, such as education and infrastructure, are also key
Office of the Auditor General
page 33
public services for economic growth.21 According to two researchers, the value of a
tax incentive is so modest in creating a new job that a $2,000 tax credit will offset only
$0.48 of a $12-an-hour wage, reducing the business’ portion of the wage to $11.52.22
This means that Arizona’s $3,000 income tax credit for creating a new job in an
enterprise zone offsets only $0.72 of a $12-an-hour wage.23 Finally, tax incentives are
often only marginally helpful when businesses decide between locations once a spe-cific
region has been identified. In Arizona, tax incentives were ranked 14 out of 17 as
a factor in business location decisions.24
Costs of incentive programs could outweigh the benefits—Despite
other factors being more important in business location decisions, states continue to
use incentives to attract companies and promote job growth. Incentives are one of
the factors affecting businesses that states can control, but they can represent sig-nificant
costs for governments. For example, Tennessee attracted Saturn to Nashville
in 1985 with an incentive package, which included tax incentives worth approximate-ly
$80 million, for approximately 3,000 jobs. This made the cost per job estimated at
$26,000; shortly afterwards for a Toyota plant, Kentucky offered between $125 and
$150 million for 3,000 jobs, putting the cost per job at $50,000 that also included a
training subsidy worth five times the Saturn subsidy. In 1994, Alabama offered
Mercedes an incentive package of $253 million for a plant that would employ 1,500
workers and required the state to purchase 2,500 cars.25
Besides case studies of costs, researchers have also analyzed the cost-effective-ness
of tax incentives and programs more systematically. One comprehensive study
of 75 enterprise zones in 13 states determined that state and local government lost
approximately $59,000 per job.26 In addition, a 2001 review of California’s enterprise
zones concluded that the state paid approximately $4,800 per job, but these num-bers
are less reliable because the study did not control for whether the job was actu-ally
attributable to the enterprise zone or not.27 Further, Ohio’s evaluation of the costs
of the enterprise zone programs determined that, to break even, three out of every
five firms that move to Ohio’s enterprise zones would have to be solely attributed to
the zone program. The authors conclude that this is highly unlikely.28 One analyst
also found that certain Ohio zones were more cost-effective than others and recom-mended
using performance-based criteria to reconfigure and decertify zones.29
Other analysts have also made similar recommendations to more closely scrutinize
tax incentive performance.30
Incentives and programs have unintended consequences—Although
researchers have not found a significant effect on job creation associated with tax
incentives and programs such as enterprise zones, they have found that such incen-tive
programs can have unanticipated consequences:
􀁺􇩉 Inability to enforce “clawback” provisions—States often attempt to protect their
investments by including “clawback” provisions,31 or mechanisms where the
government can recover the incentives should the company fail to meets its pro-
State of Arizona
page 34
jections or leave before the full period of investment has expired. However, the
development deals states offer firms are one-sided, because the company has
more information about its intentions than the state.32 As a result, the company
can renege on its commitments. In New York, NBC failed to meet its projected
job creation goals but threatened to further reduce jobs if the city acted to
recoup its losses. When states attempt to apply their clawback provisions, they
are unlikely to meet with much success.33
􀁺􇩉 Incentives redirect valuable resources—Government activities such as offering
incentives to create jobs can take away from other state and local government
programs, such as education, and as a result, can actually negatively affect
income and the residents’ welfare in an area.34 Unfortunately, when growth is
stimulated through incentives, the cost of that growth is borne mainly by the
state and local government in the form of income, sales, and property tax incen-tives.
35 Ultimately, the residents of the state and in the city may pay higher taxes
to support the same level of government services.36
􀁺􇩇 Growth is redistributed, not created, by incentives—Incentives seem to work to
redistribute existing capital and labor, but may not actually create it.37 For exam-ple,
when a business relocates from outside an enterprise zone to inside one,
no new growth has been created, the capital has simply been shifted.
Depending on the state’s economic development policy, such shifts could be
beneficial or not.38 Similarly, decreased unemployment in enterprise zones may
be incorrectly classified as growth, but may instead be due to migration patterns
away from enterprise zones rather than increased employment within the
zone.39 Unless a state wants such migration, the changes in unemployment
could be adverse.
Changes needed to better evaluate Arizona credits
The Legislature should consider taking steps necessary to evaluate Commerce’s tax
credit programs, including revising Revenue’s confidentiality statutes to better deter-mine
the cost of credits, and evaluating current and new tax incentives. A number of
states have taken steps to evaluate their tax incentives. However, Arizona is prevent-ed
f

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A REPORT
TO THE
ARIZONA LEGISLATURE
Debra K. Davenport
Auditor General
Arizona Department
of Commerce
Performance Audit Division
SEPTEMBER • 2003
REPORT NO. 03 – 08
Performance Audit
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting servic-es
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Senator Robert Blendu, Chair Representative John Huppenthal, Vice Chair
Senator Gabrielle Giffords Representative Tom Boone
Senator Peter Rios Representative Ken Clark
Senator Thayer Verschoor Representative Ted Downing
Senator Jim Weiers Representative Steve Yarbrough
Senator Ken Bennett (ex-officio) Representative Jake Flake (ex-officio)
Audit Staff
Lisa Eddy, Manager and Contact Person
Jay Dunkleberger, Team leader Kirk Jaeger
Melinda Hardman Anita Rifkin
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
September 26, 2003
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Gilbert Jimenez, Director
Arizona Department of Commerce
Transmitted herewith is a report of the Auditor General, A Performance Audit and Sunset Review
of the Arizona Department of Commerce. This report is in response to a May 14, 2002, resolution
of the Joint Legislative Audit Committee. The performance audit was conducted as part of the
Sunset review process prescribed in Arizona Revised Statutes §41-2951 et seq. I am also
transmitting with this report a copy of the Report Highlights for this audit to provide a quick
summary for your convenience.
As outlined in its response, the Arizona Department of Commerce disagrees with most of the
findings related to modifying, transferring, or eliminating its major functions. However, it agrees
with all of the findings related to the tax credit programs it administers. All of the report
recommendations are directed at the Legislature and do not require action by Commerce at this
time. We have attached a brief reply to Commerce’s response to address some statements in
the response.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on September 29, 2003.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
Services:
According to its vision statement, the Arizona Department of Commerce strives to be “the
positive force that creates networks of stakeholders and partners who work to enhance the
prosperity of Arizona’s businesses and residents.” In addition to staff dedicated to
Administration, the Department carries out its efforts through four major divisions:
􀁺􇩃 Community Development—Provides technical and financial
assistance to towns, cities, counties, and tribal communities
on land-use planning, public infrastructure, and zoning;
􀁺􇩇 Global Business Development—Encourages retention,
expansion, and location of business across the State while
it supports entrepreneurs, small businesses, and minority-and
women-owned enterprises;
􀁺􇩗 Workforce Development—Shapes policies that support
coordination of workforce programs state-wide and admin-isters
job training grants; and
􀁺􇩐 Planning, Research, and Policy—Supports the develop-ment
of a long-range, state-wide economic agenda, and
serves as Commerce’s central point of current economic
data and coordinates projects that inform economic devel-opment
policies.
Mission:
To create vibrant communities and a globally competi-tive
Arizona economy, through leadership and collabo-rative
partnerships.
Facilities:
While previously leasing space in a privately owned building,
in March 2003, the Department relocated to the Capitol
Complex Executive Tower. The Department also leases
space in Taipei, Taiwan, and in Guadalajara, Mexico, for the
combined amount of $39,280 for two foreign trade offices.
PROGRAM FACT SHEET
Arizona Department of Commerce
Program revenue:
$25,676,200 (fiscal year 2003)
Program staffing:
94.3 FTE (as of January 1, 2003, includes 16.45 vacancies)
Office of the Auditor General
Community
Development
(29.5)
Global Business
Development
(21.3)
Administration
(21)
Workforce
Development
(12.5)
Planning, Research,
and Policy (10)
Employer-Funded
Arizona Job
Training Fund
$12,947,900
General Fund
$3,670,200
Federal Monies
$4,099,400
Commerce and Economic
Development Commission
(CEDC) Fund
(Primarily Arizona
State Lottery
proceeds)
$3,395,500
Other
$1,558,200
Equipment
In addition to owning standard office equipment, the Department leases nine vehicles
from the Department of Administration at a cost of $3,815 per month. The Department
also owns a hot air balloon, purchased in 1990 at a cost of $13,592, which is used by
the Arizona Film Commission, a unit within Commerce, to promote Arizona at film-relat-ed
and nationally televised events.
Department Core Goals (fiscal years 2003 through 2005)
1. Provide accurate, timely information on Arizona’s economy and business practices to support
sound public policy and the development of the State’s long-term economic strategy.
2. Create and support local initiatives designed to enhance community vitality.
3. Build and develop the State’s economic foundations to improve Arizona’s global competitive-ness.
4. Attract and retain high-quality jobs, increase capital investment, and grow strategic industries.
5. Model effective, efficient, and responsible government delivering services in a fiscally prudent
manner consistent with the highest standards of ethical conduct.
Adequacy of performance measures:
Commerce should improve its performance measures in the following areas:
􀁺􇩍 Measures Not Focused on Results—The Department should reduce its number of performance
measures and focus on those that address results. The Department has established 226 per-formance
measures in its FY 2003-05 Strategic Plan, many of which report its service efforts but
fail to report results. For example, some programs, such as International Trade and Investment,
measure the number of visits to its Web site. However, the program’s four performance measures
regarding online visits fail to measure the results achieved by accessing these pages, such as the
number of businesses assisted online.
􀁺􇩍 Measures Do Not Reflect Department’s Performance—The Department should report only those
results that are achieved substantially by its individual efforts. For fiscal year 2002, the Department
reported that it helped 59 businesses relocate or expand in the State. However, sometimes the
Department’s role is limited to accepting a telephone inquiry from the business, referring the busi-ness
to a local economic development entity for location assistance, and remaining available to
discuss any state-wide issues with the business.
State of Arizona
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Arizona Department of Commerce (Commerce) pursuant to a May 14,
2002, resolution of the Joint Legislative Audit Committee. This audit was conducted
as part of the Sunset review process prescribed in Arizona Revised Statutes (A.R.S.)
§41-2951 et seq.
Commerce is responsible for promoting and enhancing the State’s economic growth
and development, including encouraging international trade and investment; collect-ing
and distributing economic and business-related information to the public; sup-porting
the expansion of current businesses; and attracting new businesses to the
State. Additionally, Commerce assists communities with economic planning and
facilitates the State’s workforce development system.
The Department’s organization consists of four divisions and an administrative
group. First, the Community Development Division provides technical and financial
assistance to political subdivisions and communities on land-use planning, public
involvement, public infrastructure, and zoning. Second, the Global Business
Development Division encourages expansion and location of businesses across the
State and maintains four foreign trade offices. Next, the Workforce Development
Division supports the Governor’s Workforce Development Council, which supports
efforts to prepare participants for work, and administers apprenticeship programs
and the Arizona Job Training Program, a program that helps fund job training assis-tance
to Arizona businesses. Further, the Planning, Research, and Policy Division
serves as a clearinghouse for economic issues. Finally, Commerce’s administration
supports Commerce’s planning and operational needs by providing guidance, serv-ices,
and technical assistance to executive management and department divisions.
Commerce’s functions can potentially be eliminated,
modified, or transferred (see pages 7 through 28)
The Legislature should consider terminating 4 of 13 major functions carried out by
Commerce, primarily because other programs providing similar services already
exist.1 Another four functions are also available elsewhere, and the Legislature may
Office of the Auditor General
page i
SUMMARY
find there are some benefits to providing these functions, either through Commerce
or some other agency. The Legislature should retain the five remaining functions
because they do not duplicate other programs, or they do not require state appro-priations.
However, eliminating most or all of the eight functions may leave insufficient
reason to retain Commerce. If so, the remaining functions can be transferred to other
state agencies.
Auditors identified four functions that could be eliminated because these services are
available elsewhere, or Commerce’s role is very limited or may be reduced. These
four are as follows:
􀁺􇩓 Small Business Services—Similar services are available from other federal,
state, and private sources. While Commerce no longer provides one-on-one
business counseling, Small Business Services provides the public with user-friendly
online information on starting a business, works to develop state-wide
policies that concern small businesses, and assists women- and minority-owned
businesses through meetings, referrals, and outreach activities.
However, the federal government’s Small Business Administration has a network
of ten small business development centers and satellite offices across the State,
including two women’s business centers, which provide similar services and
assisted over 7,000 people in 2002. In addition, information on doing business
with the State, and within Arizona counties, along with finding businesses to pur-chase,
is also available from a variety of public and private sources, such as the
Arizona Department of Administration’s State Procurement Office, the Arizona
Department of Revenue, business brokers, and business advocates, such as
the National Federation of Independent Businesses.
􀁺􇩁 Apprenticeship and Pre-Apprenticeship—The apprenticeship function can be
transferred back to the federal government for administration, and the pre-apprenticeship
function—a highway construction training program—can be
transferred to the Arizona Department of Transportation (ADOT). Apprenticeship
Services approves and registers all apprenticeship programs in the State, and
provides certificates to apprentices who complete these programs. Arizona
petitioned for the U.S. Department of Labor’s approval to administer this func-tion
in 1978. However, the State does not receive any federal funding to admin-ister
the program. The State could return this function to the federal government,
which administers the program in 23 other states. The Pre-Apprenticeship
Training Program for Highway Construction Careers offers a 6-week training pro-gram
for minorities and women in highway construction trades and is funded by
the ADOT using federal pass-through monies. This function was placed in
Commerce because of its close association with the apprenticeship function. If
responsibility for apprenticeship is returned to the federal government, retaining
pre-apprenticeship in Commerce is unnecessary.
State of Arizona
page ii
􀁺􇩅 Economic Information and Research—This function could be eliminated
because information retained at Commerce is already available from many other
sources throughout Arizona, and other sources have additional economic
research and analysis that is unavailable from Commerce. Under A.R.S. §41-
1504(A), Commerce acts as a central point of collection for economic data and
coordinates research projects and analysis on economic development issues
for the State. It also disseminates this information to the public. However, much
of the information Commerce publishes is already available from sources such
as the U.S. Census Bureau, the Arizona Department of Revenue, and the
Arizona Tax Research Foundation. Further, other organizations, such as the
Arizona Department of Economic Security and Arizona State University, maintain
additional economic information unavailable from Commerce. Moreover,
Commerce’s role is generally not to perform its own research, but rather to coor-dinate
the efforts of others.
􀁺􇩇 Growing Smarter functions—The Legislature can eliminate Commerce’s role in
the State’s Growing Smarter program, since its review role is only generally
defined in statute as advisory and could be reduced. Under Growing Smarter,
all Arizona cities and counties must adopt comprehensive, long-range plans that
address issues such as land use, open space, growth, and water resources.
A.R.S. §§9-461.06 and 11-806 require Commerce to receive copies of the plans
and any amendments made to existing plans before they are adopted by the
cities or counties. It also provides technical assistance with Growing Smarter
and planning. Because the statute does not describe the extent of the review or
comment, Commerce’s role is advisory only, and cities and counties are free to
ignore Commerce’s suggestions. Further, Commerce’s review and technical
assistance roles could be reduced, since the majority of cities and counties are
required by statute to submit their plans by December 31, 2003. After that time,
Commerce will review amendments or new plans.
Auditors identified four other programs that, like three of the first four, are largely avail-able
elsewhere. In the case of these four, however, there may be advantages to
retaining a state function in some form:
􀁺􇩉 International Trade and Investment Office—The Legislature could eliminate this
office, retain its functions, or ensure that Commerce charges for a portion of the
costs of its export promotional services. The Office promotes Arizona products
and services for export, and markets Arizona to foreign companies as a location
for expansion. However, the federal government and other private entities pro-vide
many similar services, sometimes for a fee. Commerce maintains that no
other entities work to bring foreign investment into the State, and other entities
would not exclusively serve Arizona clients. Commerce has statutory authority to
charge for services and is already doing so for certain functions, such as host-ing
trade shows and trade missions. Should the Legislature decide to retain this
Office of the Auditor General
page iii
function, the State could also charge a fee for other office services as well, mak-ing
this function more self-supporting.
􀁺􇩂 Business Attraction and Development and the Office of Innovation, Technology
and Entrepreneurship—The Legislature could eliminate this function, or as an
alternative, retain only its role as a primary source of contact for companies
seeking to relocate to Arizona. Business Attraction and the Office of Innovation
market the State nationally and internationally, and promote technology transfer,
research, and development in Arizona. However, approximately 300 local and
state-wide economic development organizations also offer many of these serv-ices,
and literature suggests state programs designed to attract business have
only a limited impact. Some of this function could be retained because of its
state-wide approach to business attraction. According to Commerce and
Arizona businesses, Commerce provides significant value because it is a single
source for businesses to obtain impartial information about potential sites and
the State’s business climate.
􀁺􇩒 Rural Development—This function could be eliminated, but doing so may have
consequences for some projects. Rural Development helps rural communities
with technical and financial assistance for downtown revitalization, economic
development, and business retention and expansion through its Main Street and
Rural Economic Development Initiative (REDI) programs. However, these grants
are generally small, and other sources such as the State Historic Preservation
Office and private fund-raising are available for financial assistance. Without
REDI and Main Street assistance from Commerce, rural communities might not
be able to carry out some projects, while others might take longer due to the
need to look for other sources of funding.
􀁺􇩁 Arizona Film Commission—The Legislature could eliminate this function or com-bine
the Commission with the Office of Tourism. The Commission assists pro-duction
companies that approach it about filming in Arizona. However, the
Arizona Production Association, a state-wide trade association, already publish-es
a guide that helps production companies find services from private suppliers,
and 22 local communities such as Tucson, Benson, Kingman, and the Navajo
Nation maintain film offices. Commerce argues that the Film Commission is jus-tified
because revenues from companies filming in the State exceed the
Commission’s budget. If the Legislature elects to keep the Commission, it could
transfer the Commission to the Office of Tourism because both groups work to
enhance the State’s visibility and the Office of Tourism already is involved in
assisting noncommercial film projects. An Office of Tourism official acknowl-edges
that the merger is feasible.
Commerce’s other five major functions should be retained because they provide
valuable services to Arizona businesses, workers, cities, or counties, or do not
require state appropriations. However, all five could potentially be transferred to other
State of Arizona
page iv
agencies, and the Legislature could eliminate Commerce’s administration functions
if it decides to sunset the Department of Commerce.
􀁺􇩔 The Arizona Job Training Program—This function is unique, funded primarily by
business, and is intended to improve the effectiveness of the workforce. It can
be modified so that it is completely self-supporting. This program could be
transferred to the Department of Economic Security (DES) because federal poli-cies
support combining job training programs, and DES operates the majority
of the State’s other job training programs.
􀁺􇨠 Staff Support for the Governor’s Workforce Development Council—The
Council’s duties are required by the federal government in order to allocate fed-eral
monies for programs that improve the quality of the State’s workforce. Staff
support for the Council could be transferred to DES because DES administers
these programs.
􀁺􇩅 Energy Office—The Energy Office receives more than $5 million each year from
the federal government and uses no state monies. It could be transferred to the
Arizona Department of Housing. The Department of Housing’s mission is to
facilitate affordable housing in Arizona, and the Energy Office’s role in reducing
buildings’ energy consumption could fit well within this mission.
􀁺􇩐 Private Activity Bond Function—This function should be retained because it
helps make bond funds available for projects in Arizona cities and towns. The
program could be transferred to the Commerce and Economic Development
Commission, which serves the State by investing in state-wide economic proj-ects.
􀁺􇩁 Arizona Military Airport Regional Compatibility Project—The Project, which is
currently funded primarily by a federal grant, serves a role by looking at military
air base land use from a state-wide perspective. It could be transferred to any
one of a number of executive agencies.
􀁺􇩁 Agency Administrative Functions—If the Legislature elects to sunset the agency,
it could eliminate Commerce’s agency-wide support functions such as the
Director’s Office, Human Resources, and its communications functions.
Legislature should consider evaluating tax credit pro-grams
before they are renewed or altered (see pages 29
through 37)
The Legislature should consider evaluating current tax incentive programs before
they are renewed, extended, or expanded, terminating those that are not proven
Office of the Auditor General
page v
effective. Commerce administers five tax incentive programs. While complete data is
not available for release due to the Department of Revenue’s (Revenue) confiden-tiality
statutes, businesses claimed at least $65 million in income tax credits alone
from tax years 1994 to 2000 and hold an additional estimated $60 million in unused
income tax credits that could be used on future returns. However, research suggests
that targeted incentives such as those used in the Commerce-administered pro-grams
have little impact on economic growth. For example, literature studying enter-prise
zones, which is Commerce’s largest incentive program as measured by the
number of credits used, found there was no significant impact of these zones in
increasing firm births, expansions, relocates, or income; job creation; or reducing
unemployment. In fact, a recent study of Ohio businesses found that enterprise zone
incentives in that state actually resulted in 20 percent fewer jobs being created.
Researchers point out that other factors besides tax incentives play a larger role in
economic development. For example, the labor market is far more important in busi-ness
investment decisions. In Arizona, one report noted that tax incentives were
ranked 14 out of 17 as a factor in business location decisions.
In addition to this limited impact on economic development, there are drawbacks to
government incentives. First, they can be costly. One comprehensive study of 75
enterprise zones in 13 states determined that state and local governments lost
approximately $59,000 per job. Further, incentives could have other unintended con-sequences,
such as the state’s inability to enforce provisions to recoup its investment
should the companies leave; the diversion of resources from state and local govern-ments
that could go to support other government services; and lack of growth
because capital and labor are simply moved from one place to another.
The Legislature should consider taking a number of steps necessary to evaluate the
effectiveness of Commerce-administered tax incentive programs. Other states have
taken steps to review their tax credit programs to determine whether they are cost-effective.
For example, two West Virginia organizations reviewed the state’s 22 tax
incentives for their effectiveness and recommended half of them be eliminated.
However, Revenue’s confidentiality statutes currently limit the state’s ability to accu-rately
estimate the costs of these programs. Therefore, the Legislature should follow
steps taken in other states to modify Revenue’s statutes to allow more complete dis-closure
of income tax incentives’ impact on the State. Once this is done, the
Legislature should require an analysis of Commerce’s Enterprise and Military Reuse
Zones as they expire to determine their cost-effectiveness, and require the elimina-tion
of those that are not cost-effective. Further, if the Legislature elects to expand or
extend any of Commerce’s tax incentive programs, it should consider a similar analy-sis.
Finally, the Legislature should consider requiring a cost-effectiveness analysis of
the credits before adopting new tax incentives.
State of Arizona
page vi
Other pertinent information (see pages 39 through 42)
During the audit, auditors gathered information about combining the organizational
structures of the Arizona Department of Commerce and the Arizona Office of
Tourism. In 35 states, economic development and tourism functions are organized
as one agency. However, several states have organized these functions into separate
agencies, and other states have adopted an altogether different structure for tourism
and economic development agencies, including where the functions are separated
in various state agencies or performed by private sector companies. Economic
development and tourism officials from Arizona and other states had differing per-spectives
regarding the relative advantages and disadvantages of various organiza-tional
structures for tourism and economic development functions. Some suggested
that combining the two functions could result in cost savings from shared marketing
efforts and reductions in staff. However, these officials cautioned that savings from
staff reductions are likely to be limited. Some tourism stakeholders also expressed
concerns over the possible loss of prominence that Tourism could face if it is com-bined
within a single economic development agency.
Office of the Auditor General
page vii
State of Arizona
page viii
Office of the Auditor General
TABLE OF CONTENTS
continued
page ix
1
7
7
14
22
28
29
29
30
34
37
39
39
40
41
43
a-i
Introduction & Background
Finding 1: Commerce’s functions can potentially be elimi-nated,
modified, or transferred
Four functions could be eliminated
Various options exist for four functions
Other major functions should be retained
Recommendations
Finding 2: Legislature should consider evaluating tax
credit programs before they are renewed or altered
Commerce administers five tax credit programs
Research indicates that tax incentives induce only limited economic
growth
Changes needed to better evaluate Arizona credits
Recommendations
Other Pertinent Information
Commerce and Tourism functions are in separate agencies in
Arizona
Other states organize commerce and tourism differently
Various perspectives regarding potential cost savings and structure
Sunset Factors
Appendix
Summary of five income tax credits administered by the Department
of Commerce
State of Arizona
TABLE OF CONTENTS
concluded
page x
Notes
Agency Response
Auditor General Reply
To Agency Response
Tables:
1 Schedule of Revenues, Expenditures, and Changes in Fund
Balance by Program
Years Ended June 30, 2002, and 2003 (Unaudited)
2 Arizona Department of Commerce Functions, FTEs, and General
Fund and Commerce and Economic Development Commission
(CEDC) Fund Expenditures, Fiscal Year 2003
Commerce-Administered Tax Incentive Programs
3 Commerce-Admininstered
Tax Incentive Programs
a-v
4
8
31
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Arizona Department of Commerce (Commerce) pursuant to a May 14,
2002, resolution of the Joint Legislative Audit Committee. This audit was conducted
as part of the Sunset review process prescribed in Arizona Revised Statutes (A.R.S.)
§41-2951 et seq.
Overview of Commerce’s functions
The Department was established by the Legislature in 1985 with responsibilities for
promoting and enhancing the State’s economic growth and development. Its duties
include encouraging international trade and investment, collecting and distributing
economic- and business-related information to the public, supporting the expansion
of existing businesses, and attracting targeted businesses to Arizona. In addition, it
assists communities with economic planning and facilitates the State’s workforce
development system by supporting the Governor’s Workforce Development Council.
To perform its responsibilities, as of January 1, 2003, the Department was organized
and staffed as follows:
􀁺􇨠 Community Development Division (29.5 FTE)—Provides technical and financial
assistance to political subdivisions and communities. It provides development
guidance and technical assistance in land use and zoning; contributes basic
technical and financial assistance for public infrastructure projects to rural com-munities;
promotes programs to reduce energy costs in government, commer-cial,
and residential buildings; offers energy information to support reduced util-ity
costs for low-income residents; and supports community organizations in
their economic development practices. The division consists of Community
Planning, the Greater Arizona Development Authority, the Energy Office, and
Rural Development.
􀁺􇩇 Global Business Development Division (21.3 FTE)—Works to help Arizona busi-nesses
market their products and services in international markets by providing
Commerce promotes
Arizona’s economic
development.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
assistance with exports to foreign countries, market research, and organization
of foreign trade shows. It also markets the State to attract new and expanding
businesses, encourages the film business within Arizona, and offers assistance
and resources to speed entrepreneurship growth throughout the State. The divi-sion
consists of the International Trade Office, the Arizona Film Commission,
Business Attraction and Development, Small Business Services, and the Office
of Innovation, Technology, and Entrepreneurship.
􀁺􇩗 Workforce Development Division (12.5 FTE)—Supports the coordination of
workforce programs state-wide. The Workforce Policy Office assists the
Governor’s Workforce Development Council with coordination of the State’s
workforce development initiatives, such as establishing goals for development
of employment and training systems. The division also includes apprenticeship
services, a pre-apprenticeship highway-construction trades program for women
and minorities, and the Arizona Job Training Program, which provides grant
money to businesses for employee job training.
􀁺􇩐 Planning, Research, and Policy Division (10 FTE)—Serves as the State’s clear-inghouse
for economic information, manages strategic research, and provides
and distributes information and analyses of trends, best practices, opportunities,
market issues, and department/program impacts related to economic issues
within the State. It consists of Research and Information, the Legislative Liaison,
and Communications.
􀁺􇩁 Administration (21 FTE)—Supports the Department’s planning and operational
needs by providing guidance, services, and technical assistance to executive
management and department divisions. Services provided include accounting
and budgeting, human resources, information technology, procurement, finan-cial
management, and administering five tax credits. This division also provides
administrative support for the Commerce and Economic Development
Commission (CEDC), a commission that administers a fund providing financial
assistance to support the State’s economic development efforts.
Within the Department of Commerce are the CEDC and the Greater Arizona
Development Authority (GADA), which are separate agencies that operate under
their own statutes. CEDC is a six-member Commission that administers the Arizona
State Lottery-supported CEDC Fund, which will have an estimated FY 2003 balance
of approximately $3.6 million. The CEDC provides financial assistance to support the
State’s economic development efforts and is staffed by two Commerce employees.
GADA assists local and tribal governments and special districts with the develop-ment
of public infrastructure. It uses its $20 million bond authority to leverage fund-ing,
accelerate project development, and lower the costs of project financing.
As of January 1, 2003, the Department had 94.3 FTEs, including 82.9 FTEs in author-ized
positions and 11.4 FTEs in other positions that were funded through nonappro-
State of Arizona
page 2
priated sources such as federal grants and contracts. As of January 1, 2003, the
Department had 16.45 FTE vacancies among its positions.
Budget
During fiscal year 2003, Commerce received an estimated $27.5 million in total rev-enues,
of which almost $4 million was from the General Fund. However, the largest
amount of revenue was from the federal government and other state agencies. This
included over $13.4 million for the Workforce Development Division received from the
Arizona Job Training Fund, and more than $5 million for the Energy Office programs
from the federal government (see Table 1, page 4). Additionally, Commerce received
over $2.8 million in monies from the Commerce and Economic Development
Commission. These monies are from two Arizona State Lottery games and registra-tion
fees for securities sold in Arizona, and are used to support the State’s econom-ic
development efforts as well as the operations of three Commerce divisions. The
Legislature may redirect CEDC monies for any purpose, including the State General
Fund.
Commerce’s fiscal year 2004 General Fund and Arizona Job Training Fund appro-priations
are less than in fiscal year 2003. Specifically, the Legislature reduced
Commerce’s General Fund appropriations by $340,500, a reduction of approximate-ly
9 percent. According to one Commerce official, the agency plans no reduction in
services as a result of these budget changes. Further, the Legislature enacted a law
allowing the State to transfer monies from the Department’s Job Training Fund to the
Department of Economic Security’s JOBS program, which provides job training for
welfare clients. The Legislature and the Governor approved a $3.7 million transfer
from the Job Training fund to JOBS in fiscal year 2004, and transferred an additional
$2.5 million from the fund to the state’s General Fund.
Audit scope and methodology
This audit focused on the need for Commerce’s functions, its overall responsibilities,
and whether the Legislature should consider eliminating or transferring Commerce’s
programs. In general, auditors found that even though Commerce attempts to attract
businesses and enhance economic development, research suggests many factors
beyond a state agency’s control influence business location decisions. These factors
include labor force costs, educational level of workers, and access to transportation.
This report contains two findings and associated recommendations as follows:
􀁺􇩔 The Legislature should consider taking action on several Commerce functions
because they are unneeded, duplicated elsewhere, or can be transferred.2
During fiscal year 2003,
Commerce received
$27.5 million in rev-enues.
Office of the Auditor General
page 3
State of Arizona
page 4
2002
Community
Development
Global
Business
Development
Workforce
Development
and Job Training
Planning,
Research,
and Policy 1
Finance
and
Administration
Revenues:
State General Fund Appropriation $ 1,356,395 $ 1,701,285 $ 318,915 $ 905,347 $1,219,220
Intergovernmental 2,759,498 95,708 15,189,873 251,800
Lottery proceeds 2 232,920 692,839 1,048,141
Motor vehicle taxes 11,255,598
Interest and other 2 2,004,791 1,153,158 888,085 1,274,788 865,154
Total revenues 17,609,202 3,642,990 16,396,873 3,480,076 2,084,374
Expenditures and other uses:
Personal services and employee-related
1,486,104 1,600,581 547,119 683,938 1,160,662
Professional and outside services 427,676 1,158,552 2,019 120,072 61,772
Aid to organizations 9,289,255 3,273,615 1,083,629
Travel, other operating and equipment 532,607 1,199,163 139,479 1,917,827 88,457
Total expenditures 11,735,642 3,958,296 3,962,232 3,805,466 1,310,891
Net operating transfers out 3 8,147,762 10,550,070 281,010
Total expenditures and net
operating transfers 19,883,404 3,958,296 14,512,302 3,805,466 1,591,901
Excess of revenues over (under) expend-itures
and net operating transfers 4 $ (2,274,202) $ (315,306) $ 1,884,571 $ (325,390) $ 492,473
2003
Community
Development
Global
Business
Development
Workforce
Development
and Job Training
Planning,
Research,
and Policy 1
Finance
and
Administration
Revenues:
State General Fund Appropriation $ 524,900 $1,181,628 $ 304,676 $ 692,401 $ 966,588
Intergovernmental 3,902,166 12,487,855
Lottery proceeds 2 337,171 1,242,079 899,950
Interest and other 2 951,516 614,078 592,872 332,613 645,718
Total revenues 5,715,753 3,037,785 13,385,403 1,924,964 1,612,306
Expenditures and other uses:
Personal services and employee -
related 1,464,746 1,381,121 668,868 776,348 1,188,526
Professional and outside services 1,089,673 1,059,112 74,091 604,815 72,837
Aid to organizations 3,389,134 4,213,401 719,107
Travel, other operating and equipment 509,816 __ 773,984 234,188 197,349 609,513
Total expenditures 6,453,369 3,214,217 5,190,548 2,297,619 1,870,876
Net operating transfers out 3 8,258,082 4,835,280
Total expenditures and net
operating transfers 14,711,451 3,214,217 10,025,828 2,297,619 1,870,876
Excess of revenues over (under) expendi-tures
and net operating transfers 4 $ (8,995,698) $ (176,432) $ 3,359,575 $ (372,655) $ (258,570)
1 Excludes financial information of the Greater Arizona Development Authority because it is a legally separate entity. Further, the Community Development
program estimates for 2003 exclude Clean Air Fund activity because the Fund and its functions were transferred to the Arizona Department of Environmental
Quality in August 2002. However, the Planning, Research, and Policy program includes Commerce and Economic Development Commission (CEDC)
financial activity because the Department essentially controls the Commission’s finances.
2 The CEDC provides Lottery proceeds and a portion of interest and other revenues to the programs.
3 Amounts are primarily transfers to the State General Fund or other state agencies as required by law.
4 Excess of revenues under expenditures was or will be paid from each program’s available fund balances.
Source: Auditor General staff analysis of the Arizona Financial Information System (AFIS) Accounting Event Transaction File for the years ended June 30,
2002 and 2003.
Table 1 Schedule of Revenues, Expenditures, and Changes in Fund Balance by Program1
Years Ended June 30, 2002, and 2003
(Unaudited)
􀁺􇩔 The Legislature should consider modifying the Department of Revenue’s confi-dentiality
statutes so that the true costs of Commerce’s income tax incentive
programs can be identified. Further, the Legislature should consider requiring a
cost-effectiveness analysis before Commerce renews each Enterprise Zone
and/or the Legislature and Governor renew each Military Reuse Zone, terminat-ing
those zones that are not proven effective, and before renewing or revising
any Commerce-administered tax incentive program. Finally, before new tax
incentives are adopted, the Legislature should consider conducting a cost-ben-efit
analysis of the proposed incentives.
In addition to these findings and recommendations, the report also presents infor-mation
related to different models of how economic development and tourism func-tion
are structured in the 50 states, as well as key issues concerning combining these
functions into one organization.
Auditors used various research methods to study the issues addressed in this report,
including interviewing Commerce staff and outside stakeholders, and reviewing
Commerce’s financial information, statutes, and rules. Auditors also reviewed annu-al
reports, meeting minutes, and Commerce’s strategic plan, in addition to attending
meetings such as the Governor’s Rural Development Conference and a Growing
Smarter Executive Committee meeting. Auditors also used the following specific
methods:
􀁺􇩁 Auditors reviewed literature in economic development and job creation from a
variety of sources, such as the International Journal of Economic Development
and the New England Economic Review to determine the effectiveness of gov-ernment
economic development efforts (see End Notes, pages a-v through a-vii
for a complete listing). To assess the level of potential function duplication and
evaluate whether those functions should be eliminated, modified, or transferred
to other entities, auditors interviewed members of economic development
groups such as the Arizona Association for Economic Development, Arizona
Chamber of Commerce, Greater Phoenix Economic Council, and Arizona uni-versity
representatives in economic development. In addition, auditors inter-viewed
representatives of other state agencies, including the Departments of
Economic Security, Education, Environmental Quality, Tourism, and
Transportation. Auditors also consulted federal government representatives
from the United States Department of Labor’s Bureau of Apprenticeship and
Training Western Region, the United States Departments of Energy and
Commerce, the United States Department of Defense, and the Small Business
Administration to determine the extent to which Commerce’s functions are dupli-cated,
and evaluate whether the functions should be eliminated, modified, or
transferred.
Office of the Auditor General
page 5
􀁺􇩔 To determine the effectiveness of tax credit incentives and whether their out-comes
benefit the State, auditors reviewed publications on tax credits and other
incentive programs (see End Notes, pages a-v through a-vii), legislative testi-mony
from the Arizona Tax Research Association, and available tax credit data
from Commerce and the Department of Revenue, and reviewed and assessed
the Arizona Department of Revenue’s confidentiality statutes. In addition, audi-tors
contacted representatives from six companies and two site selection firms
to evaluate the impact of the enterprise zone tax credit on companies’ location
decisions. Auditors also interviewed one researcher with expertise in the tax
incentive field to obtain his perspective on the impact of government tax incen-tives
on economic growth. Further, auditors attended a meeting of the Joint
Legislative Income Tax Credit Review Committee.
􀁺􇩔 To determine how states organize their tourism and economic development
functions, auditors reviewed information provided by the Department of
Commerce, information from other states’ Web sites, and the Travel Industry of
America’s 2000-2001 Survey of U.S. State and Territory Tourism Offices. To
obtain their perspectives on the benefits and disadvantages of these structures,
auditors contacted representatives of Arizona’s economic development and
tourism industries, as well as officials from tourism and economic development
agencies in Florida, New Mexico, Utah, and Washington.
Two entities that work within Commerce were not reviewed during this audit because
they have separate sunset legislation: the State Energy Code Advisory Commission
and the Solar Energy Advisory Council.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director and staff of the
Arizona Department of Commerce for their cooperation and assistance throughout
this audit.
State of Arizona
page 6
Office of the Auditor General
page 7
Commerce’s functions can potentially be
eliminated, modified, or transferred
The Legislature should consider a number of options related to 13 major functions
carried out by the Department of Commerce. Four functions can be eliminated
because other programs that provide similar services already exist, or because
Commerce’s role is very limited. Four other functions are similarly duplicated else-where
and could also be eliminated, but unlike the first four, there are stronger rea-sons
for retaining these as a state function in some form. Finally, while five
Commerce functions are definitely important or unique enough to be retained, all of
them could be potentially transferred to other agencies if these remaining programs
did not constitute enough of a reason to retain Commerce.
Four functions could be eliminated
Four of Commerce’s functions can be eliminated because
other agencies can or do provide these services or because
Commerce’s role is limited or may be reduced. (See Table 2,
pages 8 through 9.)
Small Business Services
What it does—Small Business Services serves the public
primarily through an Internet-based service that provides
information on how to start a business in Arizona and
access business assistance resources, such as licensing
information or procurement opportunities within the State.
This user-friendly “virtual representative” software applica-tion
was implemented in May 2002. According to
Commerce, periodic updating takes staff about 2 hours
FINDING 1
Small Business Services
(Fiscal Year ‘03)
Staff:
4 FTE 1
Expenditures:
General Fund $ 12,400
CEDC Fund 407,700
Total $420,100
1 Does not include this function’s share of the FTE rep-resenting
the director who oversees this and other
functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the year
ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 8
Table 2 Arizona Department of Commerce Functions, FTEs, and General Fund and Commerce and Economic Development
Commission (CEDC) Fund Expenditures1, Fiscal Year 2003
Function A.R.S. Section Description FTE2 Recommendation Fund Amount
Small Business Services 41-1504 and
41-1505.08
Promotes the development of small, minority-,
and women-owned businesses through the use of
the "virtual representative" software application.
Acts as a small business advocate within state
government.
4 6 Eliminate General Fund
CEDC Fund
$ 12,400
407,700
Apprenticeship Services 41-1504 Combines on-the-job training with related
classroom instruction in cooperation with the U.S.
Department of Labor to produce skilled workers.
4 Eliminate General Fund 146,500
Pre-Apprenticeship
Services
None3 Provides training to minorities and women for
highway construction trades.
1 Transfer to ADOT 0
Economic Information
and Research
41-1504 Collects and disseminates economic data and
research.
3.8 Eliminate General Fund
CEDC Fund
361,000 4
89,500
Growing Smarter
Functions
9-461.06 and
11-806
Evaluates communities' Growing Smarter Plans,
and provides technical assistance on plans to
cities and counties.
2.26 Eliminate General Fund
CEDC Fund
9,700
124,200
International Trade and
Investment Office
41-1504 through
41-1504.02
Assists Arizona businesses to expand into foreign
markets and attracts foreign investment into the
State. Includes four international trade offices
operated under contract.
5 6 Eliminate, retain, or
ensure that fees are
assessed
General Fund
CEDC Fund
330,600
842,000
Business Attraction and
Office of Innovation
41-1504, 41-1552
through 41-1552.05,
and 41-1514.02
Markets the State to attract new and expanding
businesses, with emphasis on information
technology, aerospace, bioscience, and
environmental industries. Emphasizes Arizona’s
technology-focused entrepreneurs.
9 6 Eliminate or retain state-wide
point of contact
General Fund
CEDC Fund
539,500
541,300
Rural Development 41-1505.02 through
41-1505.03
Provides technical and financial economic
development assistance to communities.
Includes the Main Street Program and the Rural
Economic Development Initiative.
4.5 6 Either eliminate
or retain
General Fund
CEDC Fund
295,400 4
177,700
Arizona Film
Commission
None5 Encourages film business within Arizona.
Provides customer service to the film and
television industry.
2.5 6 Eliminate or retain and
combine with Office of
Tourism
General Fund 299,000
Arizona Job Training
Program
41-1541 and 41-1543
through 41-1544
Offers grants to employers for employee training.
Funded by a 0.1 percent wage tax paid by
businesses.
2 Retain but make self-sufficient
General Fund 158,200
Continued
Office of the Auditor General
page 9
Table 2 Arizona Department of Commerce Functions, FTEs, and General Fund and Commerce and Economic Development
Commission (CEDC) Fund Expenditures1, Fiscal Year 2003
Concluded
Function A.R.S. Section Description FTE2 Recommendation Fund Amount
Staff Support for the
Governor's Workforce
Development Council
41-1542 Provides staff and policy assistance for the
Governor’s Workforce Development Council.
5 Retain; or transfer to the
Department of Economic
Security
$0
Energy Office 41-1504 and 41-1509
through 41-1511
Provides energy information and policy advice to
the Governor and Legislature. Implements 17
programs to encourage energy efficiency and
renewable energy usage.
17 6 Retain; or transfer to the
Department of Housing
0
Private Activity Bond
Administration
35-901 through
35-913
Allocates the private-activity tax-exempt bonding
authority to qualified issuers.
1 Retain; or transfer
to CEDC
0
Arizona Military Airport
Regional Compatibility
Project
Laws 2001,
Ch. 318 §3
Develops land-use plans for areas around
Arizona military airports.
2.8 6 Retain or transfer to
another executive
branch agency
General Fund
CEDC Fund
12,300
177,900
Agency Administrative
functions
41-1504 Provides agency-wide assistance to Commerce
divisions and functions; also includes agency
Communications and Legislative Liaison
functions.
24.2 Retain or, if Commerce
is terminated, eliminate
General Fund 1,297,900
1 Includes only the Department’s fiscal year 2003 expenditures from the General Fund and CEDC Fund, because expenditures from other funds are from monies restricted for specific purposes.
Those other funds include the Private Activity Bond Fund, Arizona Job Training Fund, Federal Fund, and Oil Overcharge Fund. The General Fund expenditures are funded from legislative
appropriations, and the CEDC Fund expenditures are legislatively appropriated from two Arizona State Lottery games and securities fees. The Legislature can redirect these funding sources for
other purposes.
2 Full Time Equivalent (FTE) staff funded by all Department sources, including those restricted for specific purposes.
3 Pre-Apprenticeship Services has no statutory authority, but exists through interagency agreement with the Arizona Department of Transportation.
4 Excludes 2003 expenditures from a one-time appropriation received in 2002 for the Arizona Partnership in a New Economy.
5 Arizona Film Commission was not created by statute.
6 FTE total does not include the function’s share of the FTE for the director who oversees this function.
Source: Auditor General staff analysis of the Arizona Department of Commerce organization chart as of January 2003, and the Arizona Financial Information System (AFIS) Accounting Event
Transaction File for the year ended June 30, 2003..
per week. Because of cutbacks in staff since June 2002, Small Business
Services reports it is no longer able to provide one-on-one counseling.
According to Small Business Services, it interacts with the public by giving vis-itors
a guide for starting and operating a business and written directions about
how to utilize its online service, and referring callers to its Web site through a
recorded message. From July 2002 to April 2003, Commerce reports that it
received 390 walk-in contacts, answered or returned over 6,000 calls, received
600 written requests for information, had nearly 16,000 online visitors, distributed
12,000 electronic reports from its virtual representative, and followed up on 152
contacts. According to Commerce, Small Business Services also functions as a
small business advocate by facilitating open communication between the
Governor and small businesses, and by working to develop state-wide policies
related to small businesses. Finally, Small Business Services supports a variety
of minority- and women-owned business services such as the Arizona Minority
Business Development Center, a center operated by the Arizona Hispanic
Chamber of Commerce, by assisting with meetings, referrals, and outreach
activities, and by inclusion in Commerce’s Web site.
Why it can be eliminated—Various other agencies provide similar services, sug-gesting
that this function is duplicative and could be eliminated. At the federal
level, the federal Small Business Administration (SBA) provides assistance
through its network of ten small business development centers (SBDCs) locat-ed
in community colleges throughout the State. Eight of these ten SBDCs are
located in rural areas of the State, and three additional satellite centers serve the
State. In working with clients, the SBDC counselors use their own resources as
well as Commerce’s online “virtual representative” and provide one-on-one
assistance, such as making appointments by phone, taking walk-ins, and
arranging training classes at the community colleges. According to SBDC offi-cials,
over 7,000 people received small business assistance during calendar
year 2002. This includes 3,500 people who received business counseling, and
other clients who, for a minimal fee, received over 38,000 hours of business
training through the community colleges. Additionally, SBA provides financial
assistance by guaranteeing loans from lending institutions and technical assis-tance
through its women’s business centers and SCORE (Service Core of
Retired Executives). SBA’s Web site includes information about business licens-es
and tools for obtaining legal help, buying businesses and franchises, and
selecting business locations. Further, SBA operates two women’s business cen-ters
located in Phoenix and Tucson that provide information to women business
owners such as how to apply for federal contracts, finance their business, or
obtain support for women with disabilities.
Other agencies at the state and county level, as well as private organizations,
also provide similar business information. For example, Web sites with informa-tion
on state services such as business licensing and procurement information
are available from the State of Arizona’s Web site, as well as the Arizona
State of Arizona
page 10
Small Business Services
could be eliminated
because various agen-cies
also provide similar
services.
Office of the Auditor General
page 11
Corporation Commission, the Arizona Department of Revenue, and the Arizona
Department of Administration’s State Procurement Office, and several counties
have information online about doing business within their boundaries, such as
obtaining licenses for businesses. For example, the Department of Revenue’s
Web site contains information valuable to businesses, such as links to various
licensing requirements and content information for over 50 state agencies.
Additionally, for persons seeking to buy existing small businesses, business bro-kers
can assist clients by locating businesses for sale and referring them to pro-fessional
accountants and lawyers for processing financial and legal matters
pertinent to a sale. Further, libraries with business sections, such as the Phoenix
Central Library, provide databases, reference books for business owners, gov-ernment
documents, and current events listings of seminars and workshops.
Finally, business membership organizations, such as the Arizona Small
Business Association and the Arizona Chapter of the National Federation of
Independent Businesses, also advocate for the needs of small businesses.
Apprenticeship and Pre-apprenticeship Services
What it does—Apprenticeship Services’ goal is to combine
on-the-job training with related classroom instruction to
produce skilled workers. Commerce administers
Apprenticeship Services under agreement with the United
States Department of Labor by approving and registering
all apprenticeship programs in the State. Apprenticeship
Services also provides completion certificates for appren-tices
who complete a registered apprenticeship training
program and places their names in the U.S. Department of
Labor’s national database. During calendar year 2002,
Commerce reports that the State issued 461 certificates to
trained individuals allowing them to find a job in various
trades. Currently, there are more than 100 registered
apprenticeship programs in Arizona that provide training in
areas such as agriculture, fishing, mining, construction, and
communications. Individual employers, employer associations, or labor or man-agement
sponsors operate the training programs in an effort to produce highly
skilled workers to meet employer demands. In fiscal year 2003, Commerce
requested and received a 1-year allocation of $125,000 from the Governor’s
Workforce Development Council to support its operations.
Why it can be eliminated—The Legislature could eliminate Apprenticeship
Services because the federal government is obligated to provide these services
if the State does not do so and currently has staff in place that work on the pro-gram.
In 1978, Arizona petitioned the Department of Labor’s Bureau of
Apprenticeship and Training (Bureau) for the ability to administer it, even though
no federal funding accompanied the transfer of responsibility. Currently, Arizona
Apprenticeship Services
could be eliminated
because the federal
government must pro-vide
these services.
Apprenticeship Services
(Fiscal Year ‘03)
Staff:
4 FTE
Expenditures:
General Fund $146,500
Total $146,500
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 12
needs legislative reauthorization to continue its participation. However, if Arizona
does not take action, an official in the Bureau office that oversees this function
stated that the federal government will be obligated to staff the operation in order
to continue to meet the needs of businesses and workers, as it does for 23 other
states at federal expense.
If it is eliminated—If the Legislature eliminates Apprenticeship Services, it should
retain and transfer the Pre-Apprenticeship Training Program for Highway
Construction Careers to the Arizona Department of Transportation (ADOT). This
federally funded function offers a 6-week training program for minorities and
women in highway construction trades. Funded by ADOT using federal pass-through
monies, Commerce records show 79 students completed the program
during the 18-month period ending June 2002. The training curriculum includes
classes in trades such as electrical, plumbing, and carpentry and is provided by
various schools, such as the Maricopa Skill Center in Phoenix and the University
of Arizona PHASE program (Project for Homemakers in Arizona Seeking
Employment). To support this function, the U.S. Department of Transportation
periodically grants funds to ADOT, which then transfers a portion to Commerce.
For example, in fiscal year 2003, ADOT received $336,000. ADOT uses these
funds to pay the schools for training, and according to a Commerce official,
Commerce is allocated $68,000 for one FTE who reports to ADOT and is
responsible for processing the applications, advertising, and making marketing
presentations.
If the Legislature elects to transfer responsibility for the apprenticeship function
to the federal government, ADOT is the logical agency to assume responsibility
for the pre-apprenticeship function. An ADOT official said that the function was
placed in Commerce because of its close association with the apprenticeship
function. However, if the apprenticeship function is transferred to the federal
level, retaining the pre-apprenticeship function in Commerce is unnecessary.
Because the federal grant can be used to support the function, one
ADOT official stated that ADOT could assume it with no cost to the
State.
Economic Information and Research
What it does—The Economic Information and Research function acts
as the State’s central point of economic data collection and coordi-nates
research projects, including analysis of economic development
issues for the State. A.R.S. §41-1504(A) requires that Commerce con-duct
research and establish and maintain a central repository and
clearinghouse for all data relating to Arizona’s economy. Auditors inter-viewed
three individuals familiar with Commerce’s research and analy-sis
role: a lobbyist, a researcher for the Arizona Board of Regents, and
an economic consultant. All three found it valuable. Although
Economic Information and Research
(Fiscal Year ‘03)
Staff:
3.8 FTE
Expenditures:
General Fund $361,000
CEDC Fund 89,500
Total $450,500
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
The Pre-Apprenticeship
Program could be trans-ferred
to ADOT since it
provides training in high-way
construction.
Office of the Auditor General
page 13
Commerce does collect state-wide economic data and facilitate economic
research, much of this information is available elsewhere. Commerce also coor-dinates
the analysis of some of this data, such as it did in the Arizona Statewide
Economic Study 2002, funded by the Commerce and Economic Development
Commission. This study analyzed and presented the State's current economic
conditions as well as emerging trends. The research division also publishes
information such as the number of businesses in Arizona and includes on
Commerce’s Web site profiles of Arizona communities containing population
data from the U.S. Census Bureau, labor information from the Arizona
Department of Revenue, and tax rates obtained from the Arizona Tax Research
Foundation.
Why it could be eliminated—The information Commerce maintains is already
available from other sources, and some of these sources have additional eco-nomic
information and research and analysis that is unavailable from
Commerce. For example, the Department of Economic Security publishes his-torical
unemployment data as well as labor and industry employment forecasts.
Further, each of the state universities provides electronic access to information
related to Arizona’s economy. For example, Arizona State University provides
the Arizona Economic Data Center, which allows Internet users to search its
library for a variety of data, including United States Department of Commerce
economic data on Arizona. Similarly, the University of Arizona provides publica-tions
on current economic information and analysis of Arizona’s economy.
Further, Commerce’s role is generally not to perform its own research, but rather
to coordinate research conducted by other entities, such as business, govern-ment,
university, and civic groups. For example,
Commerce contracted with many industry experts for its
2002 Statewide Economic Study. Therefore, this type of
research and analysis could be conducted elsewhere.
For example, the Flinn Foundation, a private, nonprofit
foundation, commissioned an economic analysis of the
bio-science industry in Arizona, comparing Arizona with
other successful states. Since all of this information is
available to businesses, media, and the general public
over the Internet, or from private sources, Commerce’s
role of disseminating this information to the public is not
needed.
Growing Smarter Functions
What it does—Under the State’s Growing Smarter Act, all
cities and counties are required to adopt comprehensive,
long-range plans for development that address issues
such as land use, open space, growth, and water
resources. These plans are developed and adopted by
Growing Smarter
(Fiscal Year ‘03)
Staff:
2.2 FTE1
Expenditures:
General Fund $ 9,700
CEDC Fund 124,200
Interagency Agreement Fund 40,000
Total $173,900
1 Does not include this function’s share of the FTE
representing the director, who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, organization
charts as of January 2003, and data from
the State’s Human Resource Management
System. Numbers are rounded.
Economic Information
and Research could be
eliminated because the
information is available
elsewhere.
communities after receiving public comment and input from various government
agencies, including Commerce. A.R.S. §§9-461.06 and 11-806 require
Commerce to receive review copies of the plans, and any major amendments
made to existing plans, before they are adopted by the cities or counties. During
fiscal year 2002, Commerce reviewed 42 city and county plans. Commerce also
provides other services to support the State’s Growing Smarter program, such
as issuing $60,000 in grants from the Commerce and Economic Development
Commission, holding two workshops each year that assist cities and counties in
developing their plans, and providing technical assistance about Growing
Smarter to cities and counties. Auditors contacted a county development official
and a representative of the Grower Smarter Oversight Council, which performs
functions such as monitoring the progress of cities and counties in developing
their plans. Both individuals commented that Commerce provides valuable
technical assistance. Commerce also provides staff support for the Growing
Smarter Oversight Council.
Why Commerce’s participation can be eliminated—The Legislature could elimi-nate
Commerce’s participation, since its review role is only generally defined in
statute, is advisory only, and may diminish when all cities and counties have
developed their plans. Specifically, statute requires that Commerce receive a
copy of these plans and amendments for review. Statute does not describe the
extent of the review or comment. As a result, in many cases, Commerce staff
suggest wording or organizational changes for the plans submitted by the cities
and towns. However, Commerce does not have authority to require these
changes, and cities and counties may adopt their plans or amendments without
incorporating Commerce’s suggestions. Further, the majority of cities and coun-ties
are required by statute to have their plans adopted by December 31, 2003,
after which Commerce’s role will be to review major ammendments to city or
county plans, review new plans if cities or counties develop them, or review orig-inal
plans for those cities that do not have a December 31, 2003, deadline. While
this may reduce the need for Commerce’s review and technical assistance,
Commerce and the representative from the oversight council believe this will
have little or no impact on Commerce’s workload. According to this representa-tive
from the council, Commerce will continue to provide expertise and informa-tion
to cities and counties that is unavailable from any other agency.
Various options exist for four functions
The Legislature should consider a range of options for four other Commerce func-tions.
These functions could be similarly eliminated because they are largely avail-able
elsewhere, but for each of these functions, auditors also identified some advan-tages
to the State continuing to carry them out, though not necessarily through
Commerce. As a result, the discussion of these four functions includes options other
than eliminating them.
State of Arizona
page 14
Commerce’s participa-tion
related to Growing
Smarter could be elimi-nated
since its role is
limited.
Office of the Auditor General
page 15
International Trade and Investment Office
What it does—According to Commerce, the International Trade and Investment
Office (International Trade) promotes Arizona products and
services for export and markets Arizona to foreign compa-nies
as a location for expansion. The export-related pro-motional
services include counseling businesses about
marketing abroad, gathering market research, providing
assistance to businesses in finding trading partners, and
organizing trade shows and trade missions to introduce
businesses to international markets. Marketing Arizona to
foreign companies involves issuing targeted mailings,
conducting presentations, and hosting trade shows.
International Trade carries out its activities through four
contracted foreign offices located in Taiwan, Japan,
Mexico, and the United Kingdom. The offices were estab-lished
between 1987 and 1995. International Trade also
maintains an office in Phoenix, staffed by five Commerce
employees. Commerce reports that during fiscal year
2002, International Trade conducted 727 substantive
export and trade-related technical assistance sessions
that helped 333 companies, individuals, or organizations.
A technical assistance session includes a range of activi-ties,
from a telephone call to spending an entire day with a
company during a trade mission.
Auditors identified three options for this function: eliminating it entirely, retaining it, or
ensuring that Commerce charge for export promotional services as permitted by law.
Why it could be eliminated—This function could be eliminated because other
government and private entities provide some similar services. The United
States Department of Commerce, Export Assistance Centers provide export
promotional services similar to Commerce but for a fee. Two Export Assistance
Centers, located in Phoenix and Tucson, are part of a world-wide network of 150
offices in 83 foreign countries, far surpassing Arizona’s 4 foreign offices. The
Export Assistance Centers offer counseling, market research, contact facilita-tion,
and other trade promotion activities. According to a Commerce-commis-sioned
study prepared by Arizona State University’s College of Business, the
federal government might better handle some of the activities currently per-formed
by Commerce, such as export counseling, technical assistance, and
country risk analysis, and Arizona should not duplicate these efforts. Commerce
states that the Export Assistance Centers duplicate Commerce’s export promo-tional
services only at a basic level, and the two Arizona Assistance Centers do
not focus on the needs of Arizona businesses. However, a review of the prod-ucts
and services offered by the Export Assistance Centers in the four countries
where Arizona maintains a foreign office and discussions with officials knowl-
International Trade could
be eliminated since
other government and
private entities offer sim-ilar
services, or
Commerce could enact
cost-saving measures.
International Trade and
Investment Office
(Fiscal Year ‘03)
Staff:
5 FTE1
Expenditures:
General Fund $ 330,600
CEDC Fund 842,000
Total $1,172,600
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 16
edgeable of the products and services offered by the centers indicates that not
only do the centers provide services similar to Commerce, they also offer some
services that Commerce does not provide, such as video conferencing with
groups of prescreened international business prospects. Further, the Federal
Export Assistance Centers support Arizona businesses. Specifically, the man-ager
of one of these Centers estimates that 90 percent of his time is focused on
Arizona companies.
One difference between the Export Assistance Centers and Commerce, howev-er,
is that whereas Commerce’s services are free, the Export Assistance Centers
charge for their services. For example, scheduling 4 to 5 one-on-one appoint-ments
with selected potential business partners in Mexico, including the servic-es
of an escort/interpreter, is $600 a day.
Additionally, private consultants, such as Ernst & Young, provide export assis-tance
to businesses for a fee. Further, export assistance is available to Arizona
businesses through the Tucson-Mexico Trade Office, operated by the City of
Tucson, to those businesses working with Mexico.
Why it might be worth continuing—Commerce maintains that International Trade
should be retained for two main reasons;
􀁺􇩎 No other marketing entity for business expansion into Arizona—Commerce
points out that no other entity markets Arizona to foreign companies as a
location to expand their businesses. However, it was not until fiscal year
2002 that Commerce separately reported the number of foreign companies
that relocated to the State. That year, Commerce reported that two interna-tional
companies moved to Arizona.
􀁺􇩏 Other programs not focused solely on Arizona—Commerce states that the
Export Assistance Centers do not work solely on behalf of Arizona busi-nesses.
However, according to the manager of the Tucson Export
Assistance Center, the centers located specifically in Arizona focus on
Arizona companies. Further, it appears that nothing precludes a center from
being able to work effectively for multiple clients. For example, while
Commerce’s contracted foreign offices do not work for other states, the
European office does work for multiple businesses, as well as Commerce.
How it could be retained but modified—The Legislature could also consider a
third alternative for this function—retaining the current four offices and directing
Commerce to enact cost-saving measures, including charging for a portion of
the costs of export promotional services as permitted by law. Although A.R.S.
§41-1504.01 currently authorizes Commerce to assess fees to businesses for
export promotional services, Commerce has not charged such fees. Commerce
does charge for participation in trade shows and trade missions; however, these
fees pertain only to the cost of the show or mission. According to Commerce, in
fiscal year 2002, it collected $49,000 for these events. Commerce does not
Office of the Auditor General
page 17
charge companies when it arranges meetings with foreign companies, or to
develop company-based economic research. The federal Export Assistance
Centers charge for their services. A United States Department of Commerce offi-cial
explained that, while these fees are less than the full cost of the services pro-vided,
charging a fee separates out the truly export-ready companies from those
who are not serious.
Business Attraction and Development and Office of Innovation,
Technology, and Entrepreneurship
What it does—Business Attraction and Development (Business Attraction) mar-kets
the State nationally and internationally to attract new and expanding busi-ness
development with an emphasis on four industries
that Commerce has identified as a priority: information
technology, aerospace, bioscience, and environmental
technology. Four full-time employees within Business
Attraction in Phoenix work with the four targeted industries
to encourage new businesses to locate within the State
and to assist existing businesses to expand, while two full-time
employees in the State’s northern and southern areas
work with businesses seeking to locate or expand there.
Business Attraction also acts as the primary state-wide
contact for businesses seeking information about relocat-ing
to the State. According to one Commerce official,
when a business calls, Commerce does one of two things,
depending on whether the business wishes to locate in a
metropolitan or a rural area of the State. For businesses
seeking to locate in a metropolitan area, Commerce refers
the call to a local economic development entity, such as
the Greater Phoenix Economic Council, and may also pro-vide
additional assistance, such as providing technical
assistance or additional information as necessary. For
businesses seeking to locate in a rural area, Commerce actively assists the busi-ness
by showing them potential sites for relocation, educating them on business
incentives and lifestyle, and arranging appointments with economic develop-ment
groups to discuss issues such as labor availability. In this way, Commerce
concentrates on assisting rural communities who might not be as well equipped
as metropolitan areas to handle business attraction and retention efforts.
According to Commerce, the Office of Innovation, Technology, and
Entrepreneurship (Office of Innovation) provides special emphasis to Arizona’s
technology-focused entrepreneurs. In October 2002, the Office of Innovation
was awarded a federal Small Business Innovative Research (SBIR) grant to cre-ate
an Arizona Federal and State Technology Transfer Program (AZFast). The
program, scheduled to be completed in September 2003, uses $100,000 in fed-
Business Attraction and
Office of Innovation
(Fiscal Year ‘03)
Staff:
9 FTE1
Expenditures:
General Fund $ 539,500
CEDC Fund 541,300
Total $1,080,800
1 Does not include this function’s share of the FTE rep-resenting
the director who oversees this and other
functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the year
ended June 30, 2003, and organization charts
as of January 2003. Numbers are rounded.
State of Arizona
page 18
eral funds and is matched by $100,000 from the Commerce and Economic
Development Commission. These funds are used for workshops and education
to promote technology transfer, research, and development in Arizona.
Auditors identified two options for this function: eliminating it entirely or retaining the
function only as a central point of contact for businesses outside the State seeking to
locate in Arizona.
Why it could be eliminated—There are two main reasons why this function could
be eliminated:
􀁺􇩓 Similar services are provided elsewhere—Many of the services that
Business Attraction and the Office of Innovation provide are available from
other local and private development agencies. For example, there are
approximately 300 local and state-wide economic development organiza-tions
throughout Arizona, including the Greater Phoenix Economic Council,
which provides assistance to businesses locating in Arizona, including
identifying potential real estate sites. Other entities represent Tucson, Yuma,
and Flagstaff; and rural organizations, such as the Graham County
Chamber of Commerce and the Parker Area Economic Development
Committee, represent their respective areas. Further, major utilities within
the State have economic development programs, including Arizona Public
Services’ (APS) Building Bridges to Businesses program. This program
focuses on business retention and expansion services, generally within the
geographic area served by APS. Similarly, Salt River Project (SRP) works
with local economic and regional development groups, including the
Greater Phoenix Economic Council, to provide information on electric rates
and service availability to businesses seeking to locate in Arizona.
􀁺􇩒 Research suggests limited impact—Research suggests that state-operat-ed
economic development efforts have a limited impact. Specifically, one
report noted that economic development and employment generation is
more likely to be successful if initiated at the community and local level
rather than elsewhere.3 However, even efforts carried out at the local level
may not be effective.4 One research effort that specifically measured the
impact of state development organizations like Commerce concluded that
state agencies promoting economic growth had no impact on wage growth
in their states.5 The most important factors in economic growth (labor
costs, availability of skilled labor, and natural resources, energy cost, and
climate) are beyond the control of state and local governments.6 A recent
study conducted by Elliott D. Pollack and Company for the Department of
Commerce notes that Commerce helped to attract to Arizona or assisted
190 companies between July 1999 and June 2002.7 However, expansions
Business Attraction and
Office of Innovation
could be eliminated, or
retained with a state-wide
point of contact.
Office of the Auditor General
page 19
such as those by Cox Communications and Wells Fargo Home Equity
Group were identified as being in the 190 assisted by Commerce.
Moreover, the study did not explore whether these businesses would have
expanded with or without Commerce’s efforts.
How it could be retained, but modified—An alternative to eliminating the function
entirely would be to retain only a central point of contact for businesses seeking
to locate in Arizona, thereby eliminating such functions as showing businesses
potential sites for relocation and arranging appointments for businesses with
local economic development groups. The central point of contact function is
important, because economic development officials contacted during the audit
reported that businesses prefer to work with a neutral, state-wide contact that
can provide impartial information about potential sites and answer questions
about a state’s business climate. Similarly, a Commerce official explains that
Chambers of Commerce cannot carry out this function, since these organiza-tions
work on behalf of their member businesses. The central point of contact
function could be provided either through individuals who answer businesses’
telephone calls and direct them to local economic development entities, or
through information maintained on a Web site. However, it would not provide in-depth
services to individual businesses. For example, it would no longer provide
site selection services for business wishing to relocate. Instead businesses
could obtain these services through local economic development groups or
other agencies.
Rural Development
What it does—Rural Development provides technical and
financial assistance to rural communities for downtown
revitalization, economic development, and business
retention and expansion. The function operates two main
grant programs: Main Street and the Rural Economic
Development Initiative (REDI). Main Street, which in fiscal
year 2004 is authorized to issue $130,000 in grants from
CEDC funds, offers both financial and technical assis-tance
to rural communities seeking to revitalize their
downtown business districts under an initiative developed
at the federal level. Communities wishing to participate in
Main Street must have a population of fewer than 50,000;
commit to employing a full-time project manager; commit
to a long-term operating budget; and have a downtown
association. Commerce has verified that 19 Arizona com-munities
met these requirements as of November 2002
and are, therefore, eligible to pursue state Main Street
monies to assist a variety of local projects. Specifically,
during fiscal year 2002, the largest grant, approximately
Rural Development
(Fiscal Year ‘03)
Staff:
4.5 FTE1
Expenditures:
General Fund $295,400
CEDC 177,700
Federal Fund 259,000
Total $732,000
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Error is due to
rounding.
State of Arizona
page 20
$23,000, helped support a training program for nonprofit and Main Street board
members. Additionally, according to one city official, Commerce awarded the
Casa Grande Main Street program $1,200 to hire an architect to prepare draw-ings
combining three buildings owned by Sun State Bank into one. Once the
architectural drawings were complete, the Bank proceeded with the remodeling
project. The REDI grant program, which in fiscal year 2004 is authorized to issue
a total of $45,000 in matching grants, offers both technical and financial assis-tance
to rural communities to develop an economic development program or
project and evaluate community resources. Similar to Main Street, Commerce
had approved, as of February 2003, 17 local governmental entities as qualified
under REDI to compete for funds provided by the CEDC. To qualify, communi-ties
must demonstrate a commitment to economic development from the com-munity
and maintain a governing body to administer funds. Projects range from
upgrading software to conducting market feasibility studies.
Auditors identified two options for this function: eliminating it entirely or retaining it.
Why it could be eliminated—Funding and technical support is available to rural
communities from other sources. For example, the State Historic Preservation
Office (SHPO) offers a local government assistance program that allows Arizona
political subdivisions to apply to become Certified Local Governments. As of
March 2003, there were 26 Certified Local Governments. Once certified, these
entities are eligible for specialized assistance and grant funds for developing
their own local preservation programs. In the year ending June 30, 2002, SHPO
awarded nine such grants totaling more than $370,000.
In addition, private fund-raising efforts have created funding for some rural
development projects, although these efforts would need to increase if the
Commerce Main Street program were eliminated. For example, the City of Casa
Grande’s Main Street program recently raised $10,400 to supplement the
$5,000 it received from Commerce’s Main Street program and the funding it
received from other sources in order to build a new marquee for a building orig-inally
constructed in 1929. However, a Casa Grande Main Street official noted
that without the funding it received from Commerce, the Casa Grande Main
Street program would have had to raise the $5,000 itself, thus taking longer to
complete the project.
Why it might be worth continuing—While the Legislature could eliminate the
Rural Development function and redirect the General Fund and CEDC monies
for other purposes, the communities that Rural Development assists view the
function as valuable. Without Main Street and REDI, these communities might
not be able to carry out some projects, while other projects would take longer
due to the need to locate other sources of funding. A Commerce official
Office of the Auditor General
page 21
acknowledged that some efforts that Main Street and REDI support in the rural
communities could survive without Commerce, but notes that Commerce lever-ages
the communities’ efforts with the assistance offered by these grant pro-grams.
Arizona Film Commission
What it does—The Arizona Film Commission provides free
support to film and television production companies work-ing
in Arizona, including location scouting, permit process-ing,
and liaison services. Commerce reports that, during
fiscal year 2002, 92 projects were filmed in Arizona, while
the Film Commission assisted 455 projects in some way.
In light of recent state budget cuts, the Film Commission
has already halted marketing efforts to bring film projects to
the State, a function it performed for many years. The Film
Commission now focuses on providing customer service to
the production companies who have approached the State
on their own.
Auditors identified two options for this function: eliminating it entirely or combining it
with the Office of Tourism.
Why it could be eliminated—There are two main reasons why this function could
be eliminated:
􀁺􇩓 Similar services are available from private sources—Similar customer serv-ice
functions are available to production companies from private sources
for a fee. The Arizona Production Association (APA) publishes an annual
state-wide directory listing verified production personnel, such as location
scouts, costume designers, and hair stylists whose services are available
to production companies for a fee. The directory also includes contact infor-mation
for local chambers of commerce and film commissions, information
on Arizona’s child labor laws, and motion picture industry tax incentives.
This directory is free to APA members, but costs $20 for nonmembers.
􀁺􇩓 Similar services are available from local film offices—Additionally, 22 film
offices throughout the State, in communities such as Benson, Kingman,
and the Navajo Nation, provide similar free services as the Film
Commission. Larger cities, such as Phoenix, also promote through the
City’s Web site that they offer scouting and liaison services, as well as infor-mation
on accommodations, equipment, and crew. The Tucson Film Office
also provides production manuals that include professional crews and
information regarding local suppliers and filming in Tucson.
Film Commission servic-es
are also provided by
private sources and
local film offices.
Arizona Film Commission
(Fiscal Year ‘03)
Staff:
2.5 FTE1
Expenditures:
General Fund $299,000
Total $299,000
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
State of Arizona
page 22
Why it might be worth retaining but combining with the Office of Tourism—The
Legislature could consider retaining the Film Commission, but transferring it to
the Office of Tourism (Tourism). Commerce maintains that the Film Commission
should be retained because it generates revenue through dollars spent by pro-duction
companies filming in the State, far exceeding the Office’s $300,000
budget. However, Commerce takes credit for revenue generated that is not
directly attributable to its efforts. Commerce also claims that many states and
countries aggressively compete for these film production company dollars, and
if the Film Commission is eliminated, these dollars will go to the more aggres-sive
states and countries. However, many factors influence production compa-nies
to film in a particular location, including scenery, production costs, and
availability of lodging. The actual impact of a state film commission is difficult to
separate from these other factors. Finally, Commerce maintains that films shot
in Arizona encourage tourism and bring more tourist dollars to the State.
However, a variety of factors influence tourists to visit Arizona, one of which may
include a film produced here.
If the Legislature elects to retain the Film Commission, it should consider trans-ferring
it to the Arizona Office of Tourism, since both entities emphasize enhanc-ing
the State’s visibility. An Office of Tourism official explained that the two
groups have explored merging in the past, and the official agreed that their mis-sions
fit together. In fact, this official notes that the main industry in rural Arizona
is tourism. Moreover, Tourism is already involved in working with noncommercial
film projects in Arizona. For example, Tourism helps organize tours of potential
film locations for photographers or film producers. In addition, Tourism maintains
a collection of photographs that are distributed to companies planning to film in
Arizona.
Other major functions should be retained
Commerce’s remaining five functions should be retained, as these functions play a
role in providing valuable services to Arizona businesses, workers, cities, and coun-ties,
or do not require state appropriations. The Legislature could retain some or all
of these functions within Commerce; however, should the Legislature elect to elimi-nate
or transfer the eight major functions discussed above, then the Legislature could
sunset Commerce. If it elects to take this step, the Legislature should retain these five
needed functions, transferring them to other state agencies, and consider eliminat-ing
nearly $1.3 million in appropriations for agency administrative functions and the
associated FTEs. These functions are as follows:
The Film Commission
could be combined
with the Office of
Tourism.
Office of the Auditor General
page 23
The Arizona Job Training Program
What it does—The program’s objective is to provide funding for job training
assistance to Arizona businesses in the form of 2-year
grants. To qualify, an Arizona business is required to match
the employee training grant expenditures in an amount
equal to 25 percent for new employees and 50 percent for
existing employees. Training can be provided by an
employer training program or by public or private higher
education institutions. During fiscal year 2003, Commerce
reports that it awarded 67 new grants, awarded over $12
million, and anticipated training nearly 21,000 workers.
Further, the program emphasizes the needs of rural and
small businesses. Specifically, A.R.S. §41-1544 reserves 25
percent of the grants for rural businesses and 25 percent
for businesses with fewer than 100 workers. The program
uses the Arizona Job Training Fund for grants funded from
a 0.1 percent employer-paid wage tax and a General Fund
appropriation for operating costs estimated to be nearly
$200,000 in fiscal year 2003. As of June 30, 2003, the Fund
had a balance of approximately $26 million, although according to Commerce,
most of this balance is committed to ongoing projects.
Why it is worth continuing, how it could be modified, and where it might be trans-ferred—
The Legislature should retain this function but eliminate General Fund
support for it and make it self-funding, because it is a unique function funded
primarily by business that is intended to improve workforce effectiveness. While
the function currently receives operating support from the General Fund, there
is no statutory requirement that the Legislature appropriate any money for it. The
function could be self-funding, by using monies in the Job Training Fund for
operating costs. Moreover, if Commerce is eliminated, this function could be
transferred to DES, which operates the majority of the State’s other job-training
programs. In fact, federal policies support transferring this function to DES.
Specifically, the Workforce Investment Act of 1998 encourages states to com-bine
separate workforce training programs such as those administered by DES
and Commerce’s Job Training Program in order to better coordinate state work-force
activities.
Staff Support for the Governor’s Workforce Development Council
(Council)
What it does—The Workforce Policy Office reports that it provides staff and poli-cy
assistance for the Council, and the Director of Commerce or his designee
serves as one of its members. The Council is mandated by the federal Workforce
Investment Act of 1998 (WIA), which requires that every state adopt a board to
The Arizona Job Training
Program should be
made self-sufficient.
Arizona Job Training Program
(Fiscal Year ‘03)
Staff:
2 FTE
Expenditures:
General Fund $ 158,200
Job Training Fund 9,485,400
Total $ 9,643,600
Fund Balance:
Job Training Fund $26,000,000
Total $26,000,000
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
years ended June 30, 2002, and June 30,
2003, and organization charts as of January
2003. Numbers are rounded.
State of Arizona
page 24
develop policies and support the implementation of a state-wide
system that will effectively and efficiently prepare partici-pants
for work. The Council meets this requirement by devel-oping
guidelines for program operations and allocation
formulas for the distribution of approximately $48 million in
funds provided by the U.S. Department of Labor. Specifically,
the Act requires the Council to develop and continuously
improve a state-wide system of employment and training activ-ities
primarily administered by DES that are dedicated to adult,
dislocated workers and youth. In addition, during fiscal year
2003 Commerce was eligible for up to approximately $110,000
in grant monies from DES. These monies were used for staff
and costs associated with educating faith-based organizations
about the WIA program. Further, the Council provides federal
monies to Commerce to pay for the Workforce Policy staff.
Why it is worth continuing and where it might be transferred—The Legislature
should consider retaining staff support for the Council because the federal gov-ernment
requires the Council. The Council allocates federal monies to support
programs that improve the quality of the State’s workforce. However, if the
Department were eliminated, staff support for the Council could be provided by
another agency, such as DES. Not only does DES receive the majority of the WIA
funds for its programs, but it also records and reports performance measures
for the federal government. Further, there may be value in
aligning workforce programs such as those funded by the
Council with others that DES currently administers. Although
some Council members do not support a transfer of the
Council to DES because they indicate that DES has not
always worked well with the Council, one official within DES
indicated that it could provide staff support for the Council
using the current $315,000 it provides to Commerce for esti-mated
staff expenditures.
Energy Office
What it does—The Energy Office provides energy policy
advice to the Governor and the Legislature, and implements
17 programs to encourage energy efficiency and renewable
energy usage, including the federal Low-Income
Weatherization Assistance Program, which provides grants
to reduce energy costs for low-income households.
Commerce reports that in 2002 this program helped 695
Arizona homes become more energy efficient. Commerce
uses 17 full-time staff to carry out all of the Energy Office’s
duties.
Staffing for the Council
should be retained and
could be provided by
DES or another agency
if the Legislature elimi-nates
Commerce.
Staff Support for the Governor’s
Workforce Development Council
(Fiscal Year ‘03)
Staff:
5 FTE
Expenditures:
Federal Fund $ 957,900
Interagency Agreement Fund 257,500
Total $1,215,400
Source: Auditor General staff analysis of the
Arizona Financial Information System
(AFIS) Accounting Event Transaction File
for the year ended June 30, 2003, and
organization charts as of January 2003.
Numbers are rounded.
Energy Office
(Fiscal Year ‘03)
Staff:
17 FTE1
Expenditures:
Federal Fund $ 3,739,800
Oil Overcharge Fund $ 8,624,600
Total $12,364,400
Fund Balances:
Federal Fund $ 933,600
Oil Overcharge Fund $ 6,042,500
Total $ 6,976,100
1 Does not include this function’s share of the FTE rep-resenting
the director who oversees this and other
functions.
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the years
ended June 30, 2002, and June 30, 2003, and
organization charts as of January 2003. The
Department provided the Federal Fund fund
balance as of August 26, 2003. Numbers are
rounded.
Office of the Auditor General
page 25
Why it is worth continuing and where it might be transferred—The Legislature
should consider retaining the Energy Office because it expects to receive
approximately $5 million in fiscal year 2003 from the federal government and
uses no state monies. However, if the Legislature elects to eliminate Commerce,
it could transfer the Energy Office to the Arizona Department of Housing. The
Department of Housing separated from the Department of Commerce in
October 2002 when Housing began operating as a cabinet-level department.
Housing’s mission is to facilitate affordable housing in Arizona, and officials from
this new department agree that the Energy Office’s role in reducing buildings’
energy consumption could fit well within their mission.
Private Activity Bonds
What it does—By complying with Title 26 of the Internal Revenue Code, every
state may allocate authority for issuing tax-exempt private activity bonds among
bond issuers in an amount dependent upon its population. The Arizona maxi-mum
for 2002 was approximately $400 million, estab-lished
by using an allowance of $75 per state resident.
Statute allows the allocation to be made to bond issuers,
who are generally county or municipal industrial develop-ment
authorities, for specific purposes. For example, 35
percent can be allocated to mortgage revenue bonds, 10
percent to residential rental projects, 20 percent to stu-dent
loan projects, 15 percent to manufacturing projects,
and 10 percent to be used at the discretion of the Director
of Commerce. According to Commerce officials, this dis-cretion
supports economic development projects. Since
1984, the Department of Commerce has been responsi-ble
for processing applications and distributing this bond-ing
authority among local governments under a lottery
process starting at the beginning of each calendar year and defined by A.R.S.
§§35-901 through 35-913. This function is not supported by the General Fund
but instead is funded by user fees from those applying for the bonding authori-ty.
For example, according to Commerce, in fiscal year 2002 application and
confirmation fees amounted to over $129,000.
Why it is worth continuing and where it might be transferred—The function should
be retained since it allows bond issuers to issue tax-exempt bonds to make
funds available to private users for projects within the State’s counties and cities.
In addition, the function is not only self-funding but periodically contributes some
revenue to the General Fund through forfeiture fees. For example, according to
Commerce in fiscal year 2002, over $119,000 was transferred to the General
Fund. Should the Legislature eliminate the Department of Commerce, this func-tion,
with its one FTE, could be transferred to any agency familiar with bond proj-ects.
According to Commerce officials, the Commerce and Economic
Development Commission, a commission that serves the State by investing in
state-wide economic projects, could administer this function.
Private Activity Bonds
should be retained and
could be transferred to
CEDC if the Legislature
eliminates Commerce.
Private Activity Bonds Administration
(Fiscal Year ‘03)
Staff:
1 FTE
Expenditures:
Bond Fund $241,900
Total $241,900
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Event Transaction File for the
year ended June 30, 2003, and organization
charts as of January 2003. Numbers are
rounded.
The Office should be
retained and could be
transferred to the
Department of
Housing.
State of Arizona
page 26
Arizona Military Airport Regional Compatibility Project
What it does—The project meets with local communities and base offi-cials
to develop comprehensive land-use plans around Arizona military
airports. According to Commerce, the Legislature created the project
through a one-time appropriation of approximately $450,000, and dedi-cates
an estimated $12,300 each year in appropriations for administra-tive
costs. Commerce used these monies for a consultant who helped
draft a land-use plan for Luke Air Force Base and the surrounding area.
The plan attempts to balance the needs of the community while limiting
urban encroachment on the base. Commerce completed the plan for
Luke Air Force Base in March 2003. While approximately $450,000 from
the General Fund was used to develop this plan, Commerce used a por-tion
of the appropriation as matching funds to obtain an additional
approximately $450,000 grant from the United States Department of
Defense’s Office of Economic Adjustment. The federal grant will be used
to develop plans for Luke Air Force Base’s Auxiliary Field 1, Davis-
Monthan Air Force Base in Tucson, the Barry M. Goldwater Range and its
Gila Bend Auxiliary Airfield; review a current plan for the Marine Corps Air
Station in Yuma; and develop a policy guidebook to benefit planning for
all Arizona communities. Commerce anticipates it will complete these
efforts in 2006.
Why it is worth continuing and where it might be transferred—The Legislature
should retain this function because it is valuable to look at air base land use from
a state-wide perspective. Developing a land-use plan for military air bases and
their air access corridors is important at the state level, because local jurisdic-tions
can adopt differing policies and procedures toward encroachment on mil-itary
bases that must be combined. Activities at Luke Air Force Base, for exam-ple,
involve eight cities and two government agencies. Further, 15 cities and 2
counties endorsed the state-wide project.
If Commerce were eliminated, this function should be transferred to another
executive branch agency. According to a representative of the Department of
Defense, the federal government would insist that the current project grant be
managed by an executive agency under the Governor’s authority. Without this,
the grant could be suspended, and the Department of Defense would examine
the possibility of issuing separate grants for each of the local jurisdictions.
The Project should be
retained and could be
transferred to another
executive branch
agency if the Legislature
eliminates Commerce.
Arizona Military Airport Regional
Compatibility Project
(Fiscal Year ‘03)
Staff:
2.8 FTE1
Expenditures:
General Fund $ 12,300
CEDC Fund 177,900
Total $190,300
1 Does not include this function’s share of the FTE
representing the director who oversees this and
other functions.
Source: Auditor General staff analysis of the
Arizona Financial Information System
(AFIS) Accounting Event Transaction File for
the year ended June 30, 2003, organiza-tion
charts as of January 2003, and data
from the State’s Human Resources
Management System. Error is due to
rounding.
Agency Administrative Functions
What it does and why it could be eliminated—Agency
administration offers management guidance and agency-wide
assistance to its divisions and functions.
Administrative functions include the Director’s Office,
human resources, accounting and budget communica-tions,
and information technology. If the Legislature termi-nates
Commerce, these functions would not be needed
and therefore could be eliminated.
Office of the Auditor General
page 27
Commerce Administrative Functions
(Fiscal Year ‘03)
Staff:
24.2 FTE
Expenditures:
General Fund $1,297,900
Federal Fund 386,300
Oil Overcharge Fund 101,400
Total $1,785,700
Source: Auditor General staff analysis of the Arizona
Financial Information System (AFIS)
Accounting Transaction Extract File for the
year ended June 30, 2003, and organization
charts as of January 2003. Error is due to
rounding.
Recommendations
1. The Legislature should consider eliminating the following Department of
Commerce functions, since, to some extent, they duplicate programs operated
by other entities:
􀁺􇩓 Small Business Services.
􀁺􇩁 Apprenticeship Services.
􀁺􇩅 Economic Information and Research.
􀁺􇩇 Growing Smarter functions.
2. If the Apprenticeship Services function is eliminated, the Legislature should con-sider
transferring the Pre-Apprenticeship Services to the Arizona Department of
Transportation.
3. The Legislature should consider options for addressing the following functions:
􀁺􇩉 International Trade and Investment Office—The Legislature could eliminate
funding for this function, retain it, or, similar to a federal program, charge
businesses for these services to help it recover a portion of its costs.
􀁺􇩂 Business Attraction and Office of Innovation—Legislature could eliminate
this function, or retain some or all functions within this function.
􀁺􇩒 Rural Development—The Legislature could eliminate or retain this function.
􀁺􇩁 Arizona Film Commission—The Legislature could eliminate this function, or
transfer it to the Arizona Office of Tourism.
4. The Legislature should consider eliminating General Fund support for the
Arizona Job Training Program.
5. While the Legislature could elect to retain the eight programs above, should it
eliminate or transfer these functions, it could also elect to sunset Commerce. If
Commerce were sunset, the following five functions should be retained and
could be transferred to other state agencies:
􀁺􇩔 Transfer the Arizona Job Training Program’s administration to the
Department of Economic Security.
􀁺􇩔 Transfer staff support for the Governor’s Workforce Development Council to
the Department of Economic Security.
􀁺􇩔 Transfer the Energy Office to the Arizona Department of Housing.
􀁺􇩔 Transfer administration of tax-exempt private activity bonds to the
Commerce and Economic Development Commission.
􀁺􇩔 Transfer responsibility for the Arizona Military Airport Regional Compatibility
Project and its federal Department of Defense grant to another executive
branch agency.
6. If the Legislature elects to terminate Commerce, it should also eliminate
Commerce’s administrative functions.
State of Arizona
page 28
Legislature should consider evaluating tax credit
programs before they are renewed or altered
Since research suggests Commerce’s tax credit programs are likely ineffective, the
Legislature should consider requiring an analysis of the cost-effectiveness of
Enterprise and Military Reuse Zones before they are renewed, and requiring similar
cost-effectiveness evaluations before modifying other Commerce-administered
credits, or adopting new ones. At the same time, the Legislature should modify the
Department of Revenue’s (Revenue) statutes to make it easier to determine how
much the credits are costing the State in terms of foregone tax revenue. While these
programs provide several different types of tax credits, businesses have used at least
$65 million in income tax credits alone for tax years 1994 through 2000, and hold an
additional estimated $60 million in credits that can be used on future returns.
However, recent research of many other states’ tax incentive programs concludes
that tax incentives are of limited effectiveness in attracting businesses or creating
jobs. In fact, research has shown that other factors, such as the availability of a skilled
workforce and infrastructure, are far more important in influencing business location
and job creation than tax incentives. In addition, tax incentive programs are costly for
states to operate, and can lead to other unintended consequences.
Commerce administers five tax credit programs
Tax credits are one way that states have historically tried to induce economic growth.
States have relied on a variety of methods to promote economic growth, including an
overall low corporate income tax rate, direct subsidies, modifying the corporate
income tax code, and providing specific, targeted incentive programs to promote
certain types of behavior. This finding examines five targeted tax credit programs
administered by Commerce. The Department of Commerce administers five statuto-rily
created incentive programs designed to encourage business location, invest-ment,
and job creation (see Table 3, page 31 for a summary of these credits, and
Appendix for a broader description of them). Through Commerce’s programs, busi-
Office of the Auditor General
FINDING 2
page 29
nesses are given an incentive to locate in Arizona; create new jobs; invest in new
machinery, equipment and inventories; or re-use and re-tool their existing facilities.
States have historically attempted to attain these goals by simply adjusting corporate
tax rates or through targeting the tax credits to a firm, an industry, a geographic area,
or a combination of the above.
Commerce shares responsibility with Revenue for administering the income tax por-tions
of these five incentive programs, although as seen in Table 3 (see page 31),
there are other tax incentives, such as property tax and sales tax benefits, also asso-ciated
with these programs. To qualify for these programs, companies must demon-strate
to Commerce that they meet specific statutory criteria. After Commerce’s
approval, the company completes a Revenue income tax credit form that is
processed with the company’s tax return. Because Commerce does not have
access to companies’ income tax returns, Commerce requires companies to notify
them of the amount of credits claimed. According to Revenue, for tax years 1994
through 2000, companies have used these credits to claim at least $65 million in
income tax credits.8 Revenue also indicates that at the end of tax year 2000, busi-nesses
held an estimated $23.4 million in unused credits from three of the
Commerce-administered tax incentive programs, and an estimated $36.2 million in
unused credits from the Environmental Technology Assistance Program as of tax
year 1998, the most recent year for which the balance is available for this program.
These unused credits can be carried forward and used on future tax returns.
Research indicates that tax incentives induce only limited
economic growth
As noted below, recent research does not support the overall use of tax incentives to
enhance economic development. Literature suggests that, in general, modifying
taxes to induce economic growth is not likely to be efficient or cost-effective. In par-ticular,
targeted tax incentives, such as those offered to firms located in a specified
geographic area such as an enterprise zone, may attract capital investments, but
have little impact on employment. Tax incentives play a small role in the costs con-sidered
by business when locating, relocating, or expanding. Numerous other fac-tors,
such as education and infrastructure costs, outweigh the role of taxes.
Moreover, zones have not proven to be a cost-effective means of producing jobs,
and tax incentives can also lead to unintended consequences.
Taxes have limited impact on economic development—Many
researchers have assessed whether taxes have an effect on economic growth.9 In
general, modifying taxes is considered to have a small impact on economic activity.
Specifically, while one researcher estimates that reducing the tax rate from 2 percent
to 1.8 percent (10 percent) would result in a 2.5 percent increase in business activi-
State of Arizona
page 30
Office of the Auditor General
page 31
Program Purpose Incentive Amount
Encourage businesses to locate or expand in areas with high
unemployment and poverty rates or in Arizona counties with low
populations
Enterprise Zone Income Tax Credit Offers up to $3,000 for each net new job created
Attract manufacturers that are independently owned by one or
more women or minorities, or independently owned by an
employer with fewer than 100 employees, to invest in locations
with high unemployment and poverty rates
Property Reclassification Reclassifies primary and real personal property taxes for up
to 5 years
Help defense contractors obtain Department of Defense
contracts, diversify into commercial markets, and adopt new
manufacturing techniques
Income Tax Credit Offers a credit of up to 40 percent of real and personal
property taxes paid based on the number of net new jobs
created
Income Tax Credit Provides $7,500 over a 5-year period for each net new job
created
Defense Contractor
Restructuring Assistance
Accelerated Write-off Subtracts amortization from taxable income at a faster rate
Encourage the development of an environmental
technology industry, recruit and expand environmental
technology companies, and encourage the use of
environmental technology products
Income Tax Credit Allows employers to deduct 10 percent of qualified capital
investment from their income tax. Credit can be carried
forward 15 years
Property Tax Assessment Reduces property tax assessment ratio from 25 percent to 5
percent of full cash value for real and personal property for
20 years
Environmental Technology
Assistance
Sales and Use Tax
Exemptions
Offers a 10-year sales tax exemption for machinery,
equipment, materials and other tangible property used to
construct a qualified facility; a 15-year sales tax exemption
for energy sources such as electricity, fuel, or artificial gas
directly used for environmental technology manufacturing,
producing, or processing
Lessen the impact of military base closures and to create
jobs and make capital investments in the aerospace and
aviation industries
Property Reclassification Reclassifies personal property in the reuse zone,
representing up to 80 percent property tax savings for 5
years
Sales Tax Exemption Provides an up to 10-year sales tax exemption for many
types of construction performed by eligible companies
Military Reuse Zone
Income Tax Credit Provides up to $10,000 over a 5-year period for each new
employee
Information Technology
Training
Encourage employers to provide their employees with
continuing technology skills training
Income Tax Credit Provides up to $1,500 income tax credit for offering
technology skills training
Source: Arizona Revised Statutes and Department of Commerce documentation.
Table 3 Commerce-Administered
Tax Incentive Programs
State of Arizona
page 32
ty above what would have occurred without the reduction,10 other analysts suggest
the effect is much less significant.11 Another study, for example, estimates that if busi-ness
taxes were increased by 17.8 percent, the average county in their study would
lose less than one small firm and approximately 1.14 employees.12 While
researchers generally conclude that taxes have a statistically significant effect on
economic activity, they also agree the effect is small.13
Researchers conclude that targeted tax incentives such as the type offered through
enterprise zones have a similarly small effect on economic activity.14 Enterprise zones
offer incentives when businesses locate to a certain geographic area and the cred-its
are designed to create jobs and encourage investment in capital and machinery.
Arizona also offers incentives targeted to specific industries, such as helping the
defense industry and encouraging the development of an environmental technology
industry. In terms of types of incentives offered, however, enterprise zones are little
more than geographically targeted versions of standard state and local economic
development programs.
The targeted tax incentive literature and specifically, enterprise zone literature,
Commerce’s largest tax credit program as measured by the number of tax credits
used, shows that zones and the various tax incentives offered to firms located in the
zones have almost no effect on economic growth. One study, for example, estimat-ed
that the average enterprise zone reduced the tax burden on new investment by
19 percent; however, the evidence from the enterprise zone literature does not sup-port
significant differences in growth rates in zones versus nonzones, despite such
reductions in the tax burden.15 Regardless of how economic growth has been meas-ured,
such as firm births, firm relocates, firm expansions, income per capita, unem-ployment
rates, or number of jobs created, no significant impact was found for these
outcomes.16 Another study noted that enterprise zones may affect where companies
locate and may shift the investment from machinery to inventories. However, if a goal
is to improve employment of residents, as it is with three of the five programs admin-istered
by Commerce, the evidence suggests that residents are not measurably bet-ter
off in terms of income per capita or employment.17 In fact, one recent study of 36
Ohio businesses compared the job growth of businesses accepting state tax incen-tives
to those not accepting them. The study found that providing incentives actual-ly
resulted in 20 percent fewer jobs, or 10.5 jobs per firm, as compared with firms that
did not accept incentives. The authors suggest that firms misrepresent their hiring
plans to receive larger incentives from government.18
Other factors more important than taxes in economic development—
While taxes and targeted incentives play a small role in economic development,
researchers point to other factors that are far more important in business investment
decisions, most of which are beyond the control of state and local governments.19
For example, one researcher estimated that the labor market has 14 times more
impact on a business than incentives such as tax and other economic development
incentives.20 Additional factors, such as education and infrastructure, are also key
Office of the Auditor General
page 33
public services for economic growth.21 According to two researchers, the value of a
tax incentive is so modest in creating a new job that a $2,000 tax credit will offset only
$0.48 of a $12-an-hour wage, reducing the business’ portion of the wage to $11.52.22
This means that Arizona’s $3,000 income tax credit for creating a new job in an
enterprise zone offsets only $0.72 of a $12-an-hour wage.23 Finally, tax incentives are
often only marginally helpful when businesses decide between locations once a spe-cific
region has been identified. In Arizona, tax incentives were ranked 14 out of 17 as
a factor in business location decisions.24
Costs of incentive programs could outweigh the benefits—Despite
other factors being more important in business location decisions, states continue to
use incentives to attract companies and promote job growth. Incentives are one of
the factors affecting businesses that states can control, but they can represent sig-nificant
costs for governments. For example, Tennessee attracted Saturn to Nashville
in 1985 with an incentive package, which included tax incentives worth approximate-ly
$80 million, for approximately 3,000 jobs. This made the cost per job estimated at
$26,000; shortly afterwards for a Toyota plant, Kentucky offered between $125 and
$150 million for 3,000 jobs, putting the cost per job at $50,000 that also included a
training subsidy worth five times the Saturn subsidy. In 1994, Alabama offered
Mercedes an incentive package of $253 million for a plant that would employ 1,500
workers and required the state to purchase 2,500 cars.25
Besides case studies of costs, researchers have also analyzed the cost-effective-ness
of tax incentives and programs more systematically. One comprehensive study
of 75 enterprise zones in 13 states determined that state and local government lost
approximately $59,000 per job.26 In addition, a 2001 review of California’s enterprise
zones concluded that the state paid approximately $4,800 per job, but these num-bers
are less reliable because the study did not control for whether the job was actu-ally
attributable to the enterprise zone or not.27 Further, Ohio’s evaluation of the costs
of the enterprise zone programs determined that, to break even, three out of every
five firms that move to Ohio’s enterprise zones would have to be solely attributed to
the zone program. The authors conclude that this is highly unlikely.28 One analyst
also found that certain Ohio zones were more cost-effective than others and recom-mended
using performance-based criteria to reconfigure and decertify zones.29
Other analysts have also made similar recommendations to more closely scrutinize
tax incentive performance.30
Incentives and programs have unintended consequences—Although
researchers have not found a significant effect on job creation associated with tax
incentives and programs such as enterprise zones, they have found that such incen-tive
programs can have unanticipated consequences:
􀁺􇩉 Inability to enforce “clawback” provisions—States often attempt to protect their
investments by including “clawback” provisions,31 or mechanisms where the
government can recover the incentives should the company fail to meets its pro-
State of Arizona
page 34
jections or leave before the full period of investment has expired. However, the
development deals states offer firms are one-sided, because the company has
more information about its intentions than the state.32 As a result, the company
can renege on its commitments. In New York, NBC failed to meet its projected
job creation goals but threatened to further reduce jobs if the city acted to
recoup its losses. When states attempt to apply their clawback provisions, they
are unlikely to meet with much success.33
􀁺􇩉 Incentives redirect valuable resources—Government activities such as offering
incentives to create jobs can take away from other state and local government
programs, such as education, and as a result, can actually negatively affect
income and the residents’ welfare in an area.34 Unfortunately, when growth is
stimulated through incentives, the cost of that growth is borne mainly by the
state and local government in the form of income, sales, and property tax incen-tives.
35 Ultimately, the residents of the state and in the city may pay higher taxes
to support the same level of government services.36
􀁺􇩇 Growth is redistributed, not created, by incentives—Incentives seem to work to
redistribute existing capital and labor, but may not actually create it.37 For exam-ple,
when a business relocates from outside an enterprise zone to inside one,
no new growth has been created, the capital has simply been shifted.
Depending on the state’s economic development policy, such shifts could be
beneficial or not.38 Similarly, decreased unemployment in enterprise zones may
be incorrectly classified as growth, but may instead be due to migration patterns
away from enterprise zones rather than increased employment within the
zone.39 Unless a state wants such migration, the changes in unemployment
could be adverse.
Changes needed to better evaluate Arizona credits
The Legislature should consider taking steps necessary to evaluate Commerce’s tax
credit programs, including revising Revenue’s confidentiality statutes to better deter-mine
the cost of credits, and evaluating current and new tax incentives. A number of
states have taken steps to evaluate their tax incentives. However, Arizona is prevent-ed
f